Leverage is a term used by people in finance to describe an investment that you make with little of your own money invested. Mortgages are typically highly leveraged investments. For example, you borrow $250,000 to buy a home with a $12,500 down payment. This means that your $12,500 investment controls a $250,000 asset.

If the home increases in value to $300,000 over the next three years, your investment of $12,500 likewise has increased to $50,000—a 300 percent return— so your down payment has more than doubled in value each year you’ve owned the home. The financial power of leverage benefits you because the entire asset goes up in value, not just your down payment.

However, leverage also has its dark side. Buyers sometimes imprudently take out a mortgage that they can’t make the payments on because of the easy terms they were offered. Adjustable rate loans (ARMs), which have low initial interest rates that can go up every year, or loans that start out with low teaser rates and then in six months or a year escalate hundreds of dollars a month, are notorious examples. It’s important to look at leverage as a double-edged tool to be used with caution.

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