Mortgage Insurance and Leverage in Real Estate.
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 $350,000 home can be purchased on an insured loan with a 5% down payment of $17,500. If the home appreciates at 2% a year, in seven years the equity will grow to $87,999 due to the appreciation and the amortization of the mortgage. That would be a remarkable rate of return. You would have to save $1,466 per month for 60 months to have the same net worth!
Without mortgage insurance you would have to have a down payment of $87,500.
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 25 years. The amortization on the 2.59% mortgage example from above has approximately $9,967.00 paid in the first year to reduce the principal which increases the owner’s equity in the home.
In Canada capital gains on your principal residence are tax free!
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, if there is someone that you know that is considering making their first home purchase, we would love to sit down with them.
We love helping people achieve net worth through owning their own home.