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Category: Diary
Tags: Loan Leverage

Finally Home

A handful of weeks ago we (that is, me and my fiancé) decided that this apartment we are living in now would be the last we would ever live in. Not to say that it's bad in particular but high-density housing in general sucks. If we lived in the country and I heard voices in the ceiling I'd have myself evaluated by a pschologist immediately, but here in a 900 square-foot apartment sandwiched between the first floor and the third floor it's quite normal to hear people talking or stomping or what have you. It may have always been like this but I've really only focused on it within the past few weeks, and like a damned protagonist in a Poe short story it's become the only thing I can focus on at times though nobody else seems to notice as much.

This is all to say that since we are slated to move out of this place in May we began shopping for houses seriously about 4 weeks ago.

To buy a house you don't need much. If you have a stable job with an employer registered with the IRS and one that issues a form W-2 (which is most of them in the US anyhow) you can provide a shoestring and some pocket lint you collect as you walk into the broker's office as a down-payment and a lender will approve you for a loan of up to 49% debt-to-income ratio.

As an aside, the debt-to-income calculation is pretty simple. For a typical month add together the absolute minimum payments on any debt you are saddled with (eg student loans, credit cards, car loans) and compare this number to your gross (pre-tax) income. 49% of your income minus debt is the maximum a lender will typically allow your house payment to be. Obviously the payment varies depending on the length and type of the loan, but typically first-time homebuyers get a pretty good deal because they want you to buy a home.

(Un)fortunately for me my employer does not issue me a W-2 and is not registered with the IRS because I do not work for a US company. This itself was a lot of fun to explain to the brokers I talked to. Even better is that I am paid in cryptocurrency by way of a dollar-pegged stablecoin on Terra (the blockchain I work on). Normally when I say this the broker's eyes glaze over and s/he has already decided that my income does not qualify because I don't have a "real" job. Despite getting paid in what the lender sees as imaginary funny-money we still were able to secure a decent loan, and after shopping around with different brokers we also were offered a decent borrow rate.

The Easiest Way to 50x Your Money For Basically Free

One of the funniest things about owning a home that most people don't seem to realize is this: a loan is just free leverage. The bank is literally multiplying your money; it's an even sweeter deal when you consider that while the value of the home outpaces inflation the principal always stays the same. Effectively, the longer you wait to pay the loan the less you have to pay, because eg $500,000 God-blessed American dollars is worth far less in say 10 years than it is today. Every day the effective value that you owe is shrinking as wages rise and as the dollar inflates.

You don't even need to have the full loan amount (duh otherwise you'd just buy it in cash). If you put eg 20% as a down-payment then the bank is giving you 5x leverage only for the cost of the interest on that loan. Similarly for 10% down it is handing you 10x leverage and for a mere 2% down this is a staggering 50x leverage. As a US citizen I cannot even access 50x leveraged margin trading on Binance (thanks SEC) but will the bank give me 50x leverage on my capital for basically free? Hell yeah they will.

Speculation

With leverage in any market obviously comes risk. The risk you take by saddling yourself with debt to buy a home is in my opinion minimal. Especially relative to things like trading equities with debt; only gold-hoarding debt-averse boomers have said things to me like "just be careful because the housing bubble could burst at any time." The absolute worst thing that could happen to me is that I'm stuck in a beautiful house for 4 extra years. What a pity that would be.

Even though we do not have visibility on the other bids put on the home the seller's agent said we beat out 9(!) other buyers. It's across from a very nice school which is coincidental for us since we're not sending anyone to school any time soon but for other people I'm sure this was a selling point. It's a litle over 2.5x the size of this apartment and was built in 2018 so the chance of needing serious maintainance in the next 6 to 8 years is slim. The yard is not well-kept but hey, this at least gives me something to do. I'm inexperienced with serious yard-work but, like with my car, it is good sometimes to just throw your full weight at the problem and figure it out as you go.

The floorplan is very open downstairs, there are no walls separating the kitchen and the living room (which is nice when you're cooking and entertaining friends) while the upstairs is cozy with two bedrooms on either side of the stairs. One of the bedrooms downstairs is painted a hideous lime-green but this seems easy to remedy. The rest of the walls are quite neutral, light gray in the living room and pale teal in the master bathroom but why this room is so aggressive I'm not sure. From the staging photos I'm guessing it was an exercise room (the photo has a bike, treadmill, TV (lol) and a mini trampoline (wut)) but I'm definitely getting rid of that ugly green.

I wish I could go live there right now, but currently I am what's termed "under-contract" on this house, meaning that I've put a chunk of the down-payment into escrow which will be given to the buyer if I breach the terms of the contract. But if the transaction goes through smoothly that escrowed amount is applied to the down-payment on the home. This money is called "due-dilligence" and (only a few years ago according to my realtor) used to be a small amount like $2500 Uncle-sam Eagle dollars but recently (see: seller's market) it's inflated to basically the whole fucking down-payment. Everyone around me seems worried about this, or throws around hypotheticals like "what if the transaction doesn't go through and you lose this money." Honestly it doesn't concern me. The only person that can breach the contract is me, the buyer. And I'm not going to so there's no reason to stress over something like this. But if you're not comfortable with taking any risk then hfsp I guess ¯\_(ツ)_/¯

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