How Do You Leverage Credit to Buy a House?
April 25, 2020
It is everyone’s dream to become a homeowner at some point in life and enjoy the luxuries that come with it. With so many ways to eventually achieve this goal, people often try every possible option available. These options include saving up money for some period or using loans to achieve their goals. The questions people have about these options:
- How much do I need to save?
- How long will I have to wait to own a house?
- Is the money I have saved enough? If not, then what will I do?
The questions are constant, and people end up using various available means to obtain houses.
Leveraging credit is one way of making things possible. But how exactly does one use credit to buy a house?
Here is a breakdown of the leveraging process and the details it contains.
First, we must define leverage. Leverage is the instance of using debt to increase the return on investment potential. For example, you purchase a property today with the view of its value appreciating very soon, but the only difference is that you use borrowed funds to finance your ambitions. This tactic has been employed by investors who worry less about savings. You also do not have to pull out money that has been used in investments giving you the ability to continue with existing projects without any problems.
The math of this trade is laid out below:
Cost of asset=$200,000
It is visible that the cost of the asset is way too much for you, so credit steps in.
This forces you (the investor) to seek the financial support of the remaining amount which is $150,000
After a period of let’s say, three years, the value of the house has risen from $200,000 to $300,000. This means that over a time span of three years, the house has appreciated by 50%, which is a significantly high percentage. The higher the leverage credit, the higher the potential gain.
Juicy as it may seem, leveraging credit requires dedication by maintaining a good credit score all the time. A credit score is improved over a period through good spending and saving habits that give an individual access to sweet offers from the financial institution of choice some can use GM Creditz to compare legit lenders online. Leveraging with credit enables us to buy more with less. Sounds sweet, right.
A good credit score gives us a variety of favorable financing options. They include:
- Earn a remarkable credit rating that is awarded by a client’s ability to repay loans and the saving strength they have.
- Promotes quick loan approvals since trust has been gained over time between the two parties.
- Raise the loan and credit limits.
- Diversify financial options by granting individuals a variety of favorable conditions.
So why leverage your credit for a house? Leveraging credit to purchase a home relatively increases your net worth, and as the value of the house appreciates, so does the net worth. A house is an asset since it is a worthy investment that may bring in good benefits if the market value is high. The interest rates are also relatively low compared to other loan types since there is the existence of high-quality collateral as security.
Though the benefits of leveraging credit may be high, it is also good to consider the downside effects it may bring if it tumbles in losses.
The following are tips one should consider before leveraging so that it works out to your advantage.
- There might be a reasonable percentage increase in the value of houses at the time of purchase, but that does not mean the rise would increase or remain over time due to the possibility of a drop in value. It is good to have reasonably lower expectations rather than high unattainable expectations.
- Some investors ignore the effect credit has on cash flow and how they will sustain themselves by ignoring common factors. They should instead ensure that the cashflow is positively consistent and covers their needs.
- As an ambitious investor, one is usually tempted to take a considerable amount of credit to satisfy their needs. If an investor encounters inevitable circumstances and the monthly obligation was too high, a problem arises. Maintaining a balance between the down payment and monthly payment is critical in such a situation.
The risks involved are, however, practical. They include:
- Immersing yourself into debt due to miscalculations or unfavorable market conditions.
- Drop-in property value. The market is not entirely consistent, and it may drop to the dissatisfaction of an investor.
- Lack of flexibility. Most financial decisions made will most definitely revolve around the credit leverage.
- Overpriced assets. The desire to end up with an asset, in the end, may lead some investors to make poor financial decisions.
- Financial stress. The thought of owning up property through credit scares some people since they are continually thinking of a way to clear it and be free of responsibility.
- Repossession of assets. When the investor does not make payments as agreed between the financial institution and him or her, it is legally possible that the property is taken by to clear off some of the debt.
Just like any other investment, leveraging credit has its fair share of advantages and disadvantages. An investor should, therefore, conduct proper research before making any financial decisions. The market value and trends should be of priority to ensure that he or she is prepared for how the market plays out. Numerous consultations with experienced property owners and real estate investors should be carried out to help in making informed financial decisions. Plan to prevent unpreparedness from countering future changes and adjustments.