Leveraging Money

Posted by: Sophie H. | Jan 09,2008


What is leveraging?  Simply, it’s investing using borrowed money.  You’re in debt, but the money you spend has the potential for a good payoff.  As far as debt goes, this is actually less risky than other types of debt – if the investment is reasonably secure.  Think of a meal spent on a credit card.  You’ll be paying off the meal long after it’s been digested – pretty much the worst thing you can put on a credit card.  An investment, at least, has the potential to make more money.    

One good way to leverage money is via a home equity loan.  Otherwise it’s not very easy to get the kind of money you need to put that money towards a new investment.  The trouble is that equity is an investment in itself.  By spending the equity, you’re making your own equity portfolio less valuable.  But no investment is without its risks.  

Due to the declining housing market, now might be a good time to cash out equity before the equity on your home plummets further.  There’s no saying that your home value is going to skyrocket again, certainly not like it has in the past decade leading up to the collapse.  With some lenders it could be difficult to get a home equity loan with good terms, so you’ll have to shop around.  

The strength of the leverage depends on the strength of the investment, so do your homework. If you’re already teetering on shaky ground financially, you may not be able to absorb the loss that comes from a bad investment.  Unfortunately, a number of people who leverage their homes are looking to get rich quick, or build up a retirement portfolio quick, which can sometimes fall on its face.  So long as you can weather a loss and the investment seems sound, leveraging can make sense because you can then pay off the home equity loan early with cash savings left over.  

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