I know little on leverage/arbitrage, please explain.

In investing, "leverage" means borrowing in order to invest in order to magnify your gains (or losses). For example, say you had $100 to invest, and the market goes up 50%. You end up with $150. That's without leverage. So then instead, you still have $100 but then you borrow another $100. The market still goes up 50%, but you have $300 now so instead of a 50% return you get a 200% return. (Of course, all this ignores costs -- you would be charged interest on the loan, reducing your actual return.)

So what's the catch? Well, assume that the market goes

*down* 50% instead. In that case, in the first example your $100 becomes $50. In the second case, however, your ($100 + $100 borrowed) becomes $100, then the lender forces you to spend your original $100 to pay back the loan in full (this is called a "margin call") and you're left with $0. The market only went down 50%, but you lost 100% of your investment.

How does this apply to a house? Say you have $100,000 and want a $100,000 house. You could just pay cash, and have an asset worth $100,000. Or you could put 20% down and get a mortgage, which means your $100,000 would buy you a $100,000 house

*and* $80,000 worth of stock. The risk, of course, is that in a 2008-style recession the stock might go to $40,000 and the house might go to $50,000, while you still owe $100,000 and thus you end up with negative equity. (Of course, that only matters if you sell -- mortgages don't have "margin calls," only foreclosures if you can't make the payments.

*If* you can wait until the recovery, you're fine.)

"Arbitrage" means profiting off a difference in interest rates (or prices between markets), which is another way of thinking about investing while holding a mortgage. If you assume that your 30-year mortgage costs 4% but the market returns (on average) 7%, then by investing while holding a mortgage you make 3% profit without doing any work. It's not

*really* arbitrage because what that 3% profit is actually doing is paying you for the "2008 risk" in the example above, but it's perhaps useful to think of it that way.