Lender and Property Investor Risk RelationshipAs an investor, you need to understand the “risk relationship” between lender and yourself, the property owner. Let’s start with a few questions: 1) You put a 20% down. Lender lends you an 80% loan. Who is taking a bigger risk, you or lender? Answer: You. Why? Because if property goes down 5%, and then you have to sell and pay all closing costs, commissions, etc, you lose your down payment, but lender is still sitting tight. So lender is in a “safer” position than property owner in this scenario. 2) Lender lends you 100% of loan. You put no money down. Who is taking a bigger risk, you or lender? Answer: Lender. You transferred risk from you to lender. If you had to walk away, lender now is stuck with a problem (does this scenario sound familiar to anyone?). So as an investor, you played a “safer” position. 3) Lender lends you 65% of loan. Who is now sitting safe, you or lender? Answer: Lender. Lender has a lot of “protective equity” to protect them - and you have shifted more risk to you and away from lender. 4) You have an EXISTING loan of 90% LTV on an investment property. You decide to pay down the loan to 70% LTV from some money you made on another investment. Is this a good idea? Answer: You shift MORE risk to you from lender. By paying down the loan, you put lender in a SAFER position, and you in a RISKIER position. Here is a list of things to consider when you pay down your mortgage: * That ADDITIONAL payment is earning 0% when you pay-down the mortgage. Think about it carefully. I can go on and on, but realize that paying down your mortgage with ADDITIONAL payments is not the most efficient use of your money. However, there are REALLY good ways to pay-down your mortgages FAST, but not with the above method. I will cover that in future post. For now, recognize that there is a “risk relationship” between you and lender, and it is always shifting. So should you NOT pay down your mortgage? No, I did NOT say that - there is something to be said about feeling “safer” by paying off the mortgage of your primary house and not having to worry about it - errrr - except that now you look “mighty good” for a lawsuit! George Antone http://www.wealthclasses.com
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