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Old 10-03-2005, 02:24 PM
reguru
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Smile Use my mortgage to leverage.

A simple case of using leverage to buy a house for $100,000, using a conventional down payment of 20 percent, i need to borrow $80,000 to complete the purchase(also known as 80 percent loan to value). Simplistically, if i sell the house in one year for $120,000, i will make a profit of $20,000. However the deal is better than it appears as i used the leverage of the borrowed $80,000 to increase the rate of return frm 20 percent on the gross price of the house, to a 100 percent rate of return on the $20,000 cash down payment you originally invested($40,000 from $20,000).

Why is use of leverage a good deal? First of all, without leverage you would need $100,000 to buy the house. This makes it very hard for hte average homebuyer. Secondly, by using the leverage of loan, you increase the profit on your investment from 20 percent to 100 percent. If you are one of the fortunate, and you have the $100,000, because of leverage, you could buy five houses and make another $100,000!
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