Most people think of housing investments as safe, consistent and reliable, but in reality, buying a house is a highly leveraged purchase. The traditional, “conservative” recommendation to put down 20% when you buy a home means that you’re borrowing 80% of the value of your house. If your home price drops by 20%, it doesn’t mean that you’ve lost 20% of your investment, it means you’ve lost 100%!
Think of it this way — if you buy a $100,000 house and put down $20,000, you owe the remaining $80,000. If that house drops in value by 20% to $80,000, you could sell it and pay off your mortgage but you’ve lost all of your initial $20,000 investment.
Some loans are even more lenient in terms of a down payment. FNMA offers a 3% down mortgage option, and the VA offers a 0% down home mortgage. In these cases, you’re even more leveraged. True, leverage works both ways, and you stand to gain a similar amount if your home appreciates. However, many people don’t understand how putting down a small amount of money magnifies their leverage.