The Negatives Of Having Leverage
Leverage in real estate can be a great thing, especially when you are trying to sell or buy a house. Whether you are selling or buying, having leverage means that the ball is in your court and you have a better possibility of having more leeway with what you are trying to do. You have better opportunities and it also means that you are winning in the situation you are in.
However, there are also scenarios in which having leverage can be a bad thing with the outcome that is presented. Examples are below.
Leverage: It Cuts Both Ways
For instance, if you put down 20% when you bought your home 2 years ago, even though 20% would have been considered a healthy down payment 2 years ago, that still means that you are able to live in a place that costs 4-5 times as much as you have into it in cash.
Then with the current economic problems, you have a mishap maybe with your income (i.e. a loss of a job, decreased bonus, demotion, decrease in business income, etc.) and you are unable to continue to make the monthly payment on your current mortgage.
Another instance is if home values in your area recently went down 10%? You can still sell your home for more than you paid, and move into a cheaper living situation; either buy a smaller home or rent a place that is less on a monthly basis.
But when home values have gone down 50% in your area, you then have some tough decisions to make, and we have seen homeowners struggle every day making these tough decisions.
Usually in these cases when having leverage can backfire or put you in a long term situation that isn’t always the best, we usually give people the following options as explanations to help them.
The list of options include the following below:
- Continue making your payments
- Short sell your house
- Attempt to get a loan modification that will most likely still leave you with 50% (or more) negative equity