A mortgage is more than a huge, scary debt you have to pay to own a home.
This is an opportunity, thanks to historically low interest rates, to get ahead financially, whether by creating wealth or better managing your other debts.
First, understand the difference between good debt and bad debt.
Simply put, good debt is any debt that can increase your wealth or bring you personal value. Bad debts are things that are used to buy things that are losing value, like credit cards, car loans, and buy now, pay later programs.
Certain types of debt are worth adding to your mortgage, especially with the low cost of borrowing.
Here are four examples.
Most people need money to make money
and investment debt is usually the best way to do it.
Think about real estate investing. Almost all investors would not be able to afford to pay cash for their real estate assets, so they take out bank loans.
This strategy is even more attractive in today’s climate where investors can pay 3% interest on a mortgage but earn rental income at a higher rate while claiming a tax deduction on interest charges.
It’s not just about real estate – the equity market typically pays returns above 4% and many quality companies have dividends above that.
To borrow to invest, a mortgage is often the best tool because it charges the lowest interest rate.
Credit card debt can cost around
20 percent interest, while payday loan interest rates are higher.
If someone has a pile of personal debt that they just destroyed, a debt consolidation loan may be an option.
But there is one big rule when you do this: cut off the credit card or any offending loan that got you in trouble. Otherwise, the process could repeat itself and a new debt spiral begins.
By consolidating debt, several frustrating monthly repayments can become a single payment, and the reduction in interest charges resulting from using a low-interest mortgage should free up additional cash to pay off that consolidated debt faster. .
Starting or starting a small business is an asset, as is ownership or stock.
So, any debt used to help build that business is usually good debt, provided it is done carefully with the help of professional advisers. You don’t want to spend money on a business idea that gets nowhere.
And you don’t want commercial debt to consume you due to a change in operating conditions – like a pandemic.
I was once told wisely that the only thing you can buy for your children and be assured that they won’t be crushed, lost or destroyed is a good education.
This same principle applies to yourself. Invest in your own education – from
additional professional training up to a university degree – can dramatically increase your earning potential.
If you have to borrow money to boost your intelligence with new professional knowledge, that’s a fair price to pay.
Originally published as Good debt you can add to your mortgage