- Ryan O.
Archimedes of Syracuse, the famous Greek mathematician, once said, "Give me a place to stand and I will move the Earth."
The use of leverage makes owning real estate unique. For example, let's say you have $100,000 cash. With that money, you could purchase a $100,000 home. In Honolulu, I doubt that will buy you more than a parking stall.
The other, more common option is to get a mortgage through a lender. Most buyers try to put 20% down. If you were to buy a $500,000 condo, 20% down would be $100,000. By leveraging your money, you are able to increase your purchase price to a higher amount.
Why does leverage affect the value of your property?
Let's say in 12 months, homes prices appreciated 5%. In the all cash purchase, a 5% increase is $5,000. In the mortgage example, a 5% increase is $25,000. By using leverage, your home value would have appreciated $20,000 more than the all cash purchase. Now imagine that 5% increase every year you own the home.
When our parents bought their homes, they had to put down 20% and mortgage rates were over 10%. Thankfully, many mortgage lenders are allowing owner-occupied buyers to put 5% down for conventional loans. Since you are not putting 20% down, the mortgage lender will add on mortgage insurance; this is a nominal monthly cost to your mortgage.
With Oahu's rising housing prices, putting less than 20% down has allowed a lot of my clients to purchase their first homes.
If you are looking to purchase your first home, it might be good to take advantage of our low mortgage rate environment.
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