I did not suggest you spend $1 to save 35-40 cents in tax. I suggested you borrow money for a net of 4% and make 7-8% on the money. The tax deduction merely let's you borrow for 4%. Making more than you pay is arbitrage. Would be interested in your argument against that.
Leverage is putting a down payment of 10,000 on 100,000 house and having the value appreciate based upon the 100,000 not the 10,000. When the house appreciates over time your value increases based upon the total value not just the money you put into it. If you put 10,000 in the stock market and it doubles in value, you have 20,000. If you put 10,000 into a 100,000 house and it doubles you have 200,000. That's leverage.
“I suggested you borrow money for a net of 4% and make 7-8% on the money. The tax deduction merely let’s you borrow for 4%. Making more than you pay is arbitrage. Would be interested in your argument against that.”
My argument: there is no such thing as a free lunch. Your strategy appears to ignore risk. More risky investments rightfully have higher returns. What you’re suggesting is taking a mortgage against real estate, which has been shown to be relatively risky of late, and if I understand correctly, invest it in the stock market or elsewhere. All of which are relatively risky as compared to the loan issued.
This really isn’t much different from leverage in the macro sense.
Let’s simplify it. Let’s say you take a $100,000 mortgage against your paid off home and use it to purchase growth stocks. Growth stocks can offer returns much better than a savings account. That’s because they’re more risky. Now let’s say you bought into the market 18 months ago. Chances are, you’ve since lost about 1/3 to 1/2 your investment. It’s also possible that you would buy today and were to gain a significant amount in the future. But we don’t know that’s going to happen. And if you have a reliable crystal ball, I’d sure like to borrow it.
The only time that in my view an investment as you’re proposing would make sense is if you were able to borrow at a rate significantly lower than what you could lend it out for using a similar risk profile. So for example you borrow at 4% and can put it in a CD at 8%. That is a very unlikely scenario, although it has happened rarely in the past. E.g. folks who borrowed against their homes in the early 1970’s were able to put money into CD’s at a higher rate during the late 70’s. While it’s possible for that to happen again, I don’t think it’s wise to bet on it.
There is also a cultural dimension to all this. I do not buy on to the idea that your personal home is an investment in the sense that it has been touted in recent years. It’s shelter, not a piggy bank.
Naturally it’s your money, and you might send me a note a few years from now telling me what a great investment it turned out to be. I hope that’s the way it turns out for you.