Leverage gives the user a maximum advantage whether it is physically lifting a large object or rapidly building equity in a home. In the case of the home, the high loan-to-value mortgage allows the profits made to be greater than simply the cash invested.
A $250,000 West Hartford home can be purchased on a FHA loan with a 3.5% down payment of $8,750. If the home appreciates at 2% a year,in seven years the equity will grow to $75,920 due to the appreciation and the amortization of the mortgage. That would be a remarkable 36.2% rate of return.
It is estimated that homeowners have a 45 times higher net worth than renters. Since the obvious difference is that renters don’t own a home, owning a home is a distinct advantage. The leverage that allows a borrower to control a much larger asset with a small down payment gives them a return on the much bigger asset than on just the down payment.
Another interesting contribution is the forced savings that occurs with each payment made on the mortgage. A portion of the payment is applied to principal so that the loan will be paid in full by the end of the term, usually 30 years. The amortization on the 4% mortgage example from above has approximately $4,300.00 paid in the first year to reduce the principal which increases the owner’s equity in the home.
For people who have the necessary funds for the down payment and good credit, buying a home can be a financially stabilizing event. While research on the Internet can provide valuable information, there is no substitute for having a face-to-face meeting with a trusted professional to determine your specific facts. Call me today for a no obligation consultation 860-578-2623.
Author:Ana Festa Phone: 860-578-2623 Dated: March 7th 2016 Views: 313 About Ana: “My mission is to develop long-term client relationships by providing the most professional, infor...
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