Making Home Offers

Many financial advisors, even conservative ones, recommend borrowing as much as you can at today's low interest rates. Today, lenders make it easier than ever to do just that.

Not long ago, lenders limited the amount borrowers could pay for their monthly housing expense (principal, interest, taxes and insurance) to 28 percent to 32 percent of their monthly income. Now, many lenders permit high income-earners to apply as much as 50 percent of their income to their housing expense. This makes it easier for borrowers to qualify for larger mortgages and to buy more expensive houses.

Lenders have also eased up on the amount of cash they require a borrower to contribute to a home purchase. First-time buyers in high-priced markets like San Francisco, Boston and New York City, are often making cash down payments equal to 5 percent of the purchase price, or less. A couple of decades ago, the norm was 20 percent.

House Hunting Tip: An advantage of borrowing as much as you can is that you can take advantage of leverage. Leverage is using someone else's money to buy an investment. The less of your own money you use to buy an investment, the more highly leveraged you are. For example, if you put 5 percent cash down and borrow 95 percent of the purchase price, you'll be more highly leveraged than you would be if you borrowed 80 percent and put 20 percent down.

One reason to consider a highly leveraged purchase is that the profit potential is greater than it would be with a less leveraged purchase. Suppose you buy a home for $350,000 and put 20 percent, or $70,000, down. If the property appreciates 10 percent, it will be worth $385,000. You will have earned $35,000, a 50 percent return on your investment of $70,000. With a 10 percent down payment of $35,000, you earn 100 percent on your investment. The lower down payment yields a higher return. But, if you were to pay all cash, you would earn only 10 percent on your investment.