Not all debt is considered ‘bad debt.’ In fact, your mortgage is actually regarded as good debt. Simply put, if it increases your net worth or has future value, it’s classified as good debt. But if it doesn’t do that and you don’t have the cash to pay for it, it’s bad debt. However, we break it down in even more detail so you can learn exactly why your mortgage counts as good debt.
Mortgage is arguably the best debt you can have! You have to live someplace, so why not live somewhere that gains value in the future? If you take out a loan to fund a property that will go up in value each year, this is considered excellent and manageable debt. Suppose the asset you are purchasing will lose value relatively quickly. In that case, this is deemed bad debt and is not recommended — this includes cars, clothes or any material or consumable items. With current trends and rising home prices — the odds are stacked in your favour.
Compared to credit cards, mortgages come with low interest rates. Credit cards can really take a hit on your financial health and are considered bad debt. This is because credit cards have high-interest rates in comparison to mortgages. On average, mortgage interest rates fall well below 6%, while credit cards average a 19% interest rate. With interest rates remaining low and your home’s value slowly climbing — the risk is worth the reward.
Owning a home provides an assortment of potential tax breaks unavailable to renters. Paying rent every year can be seen as lost money in many ways. Primarily because you do not own any part of the property, you are paying for. Additionally, as a homeowner, you are entitled to a variety of tax breaks. You can write off the taxes on your property and the amount of yearly interest you pay on your mortgage. Pro tip: Any debt that you can write off can be considered good debt.
Not only does your home increase in value over time, but you can use your home as collateral for a home equity line of credit. This provides a large sum at a low interest rate. These lines of credit are useful for contributing to your children’s post-secondary education, paying off credit cards with high-interest rates, or even funding home improvements. Investing in home improvements to increase your home’s value is beneficial for using a home equity line of credit. Just remember to keep up with the monthly payments — or your house can be subject to foreclosure.
As you can see, not all debt is created equal. High-interest loans are never a good idea, but luckily, a mortgage is a debt that allows you to dream of a more financially secure future! For more helpful info, don’t forget to read the SkyHomes blog.