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Leverage and the Power of a Low Down Payment

Housing is an investment that can double your money while the underlying house has only increased by 10 percent.  When you purchase a home with a low down payment and the value of the house increases your equity increases exponentially.

Take for example one of the best and most common loan products I offer, our conventional 30 year fixed loan that requires only 5% down with no mortgage insurance.  If you were to have bought a $200k home using this loan in 2010 you would have brought in a $10k in down payment and say $6k in closing costs for a total investment of $16k.  Houses since that time have increased around 35% making your home now worth around $270k an increase of $70k.  That same 35% increase in the value of the home creates a 337% increase in your equity position as your original $16k has now turned into $70k.

Now one must never forget that risk and reward are a two horse team.  Take the opposite example where your purchase a home for $500k in 2005 using a 10% down payment.  Three years later in 2008 that same home is now worth only $400k.  Well that $50k down payment you put down is now actually worth -$50k in equity.  A $100k loss or 200% on a 20% drop in the value of the home.

Leverage and the power of a low down payment can create quick gains and quick losses.  Recognizing this power and understanding it can help you pick the right home at the right price.  For help applying this information to your specific situation please give me a call today at (858)829-2243.

 

 

 

 

 

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