Even children on a seesaw know how the mechanical version of leverage works. The financial form is a little more complicated, yet still has the same principle at its core. Financial leverage can bring more than just a smile to your face. Used properly, it can help to build your wealth.
Not many people like to have a mortgage loan, but with the right information at hand, that mindset can change quickly. Having a loan simply means you’re using a little bit of your money and a whole lot of someone else’s.
Ever try to pull a nail from a piece of wood with your fingers? Pretty hard isn’t it? Ever try to buy a home with all cash? That’s pretty hard to pull off, too. When buying a home, think of the mortgage as you would using a hammer to help remove that nail. A loan is just a tool that lets you achieve ownership a lot faster and much more easily than you would without it.
But what about all that interest? Well, if you added up the total interest you pay over the life of the loan and compared it to the value of the house after the same 30 years, the interest paid can be much less than the gain in value.
Example: $100,000 loan at 5% = $93,255 total interest paid. If the home started at $125,000 and appreciated at 5% per year, the value would be $432,194 at the end of 30 years.