On any given day when we peruse the blogosphere, we can read articles about nearly any aspect of personal finance: spending, saving, investing, retirement, and the list goes on and on. Many of us are on what I like to call the Debt Annihilation Track- out to kill debt of any kind at any cost. Many encourage us to pay off debts before marriage or combining finances. War has been declared on Debt in many households, and in many cases Debt is losing.
I agree that in many circumstances debt is bad. This is especially true if said debt comes in the form of credit card debt, 410(k) loans, personal loans, etc. Don’t get me wrong- I think that paying off debt is a really really good thing. Especially if the debt comes with a high interest rate attached, as is the case with most credit cards.
However, in all of this it sometimes gets forgotten that debt can be a tool, and you can use this tool to your advantage. Sometimes debt can help you achieve a goal that would otherwise be out of your reach. Case in point: mortgage debt. I know that some authors advocate saving up to purchase a home outright, and I seriously salute those who can do that, but for many of us it often makes the most sense to take out a mortgage. This allows you to leverage your money. When you leverage your money, you can essentially make a smaller amount of money “go farther.”
How so? Well, for example, say you have been a good little saver and you have saved up say $150,000. You could take your money and spend it all on a nice house for $150,000 and you would have zero mortgage debt. You borrow zero from the bank. On the surface this sounds like a really great idea (and even more so for those who have experienced the pain of trying to get a mortgage post-real estate bubble burst). However, you have not leveraged your money at all. Furthermore, how long would it take to realistically save this amount of money?
So how can you leverage your money? That’s what a mortgage is for. In this scenario, one of the available alternatives is that you could take out a mortgage for say 80% of the purchase price of the home- so in this example you would take out a mortgage for $120,000. That means you only put $30,000, or 20%, down. That’s why this is called leveraging your money- because you only used $30,000 of your own money to purchase something worth $150,000. Even better- you still have the rest of your money. You can save it, start an emergency fund, send Junior to college, OR you could even buy a rental property. Then your tenants could pay off the mortgage balance for you. There are also tax benefits to having a mortgage that you do not get when you are renting. That would be good, right?
Please be aware- real estate investment is not without risk; there are still plenty of people in parts of the US today who are dealing with houses that are underwater (meaning they are worth less than what is owed on the mortgage). I suspect those folks might say that mortgage debt is pretty ugly. Owning rental properties, or even owning a home, is not for everyone. As for Mr. CMF and I, we keep substantially more in our emergency fund these days because we know that if a furnace goes out or a roof leaks, we are on the hook for that. However, we love having rental properties because we think it is super cool that our tenants are paying off our mortgages for us. Even though we are currently having a cash flow issue with one of our properties- and we really kinda wish we had not bought that particular home (our former residence) – we would still say that our mortgages have been great tools that have allowed us to purchase assets that we might otherwise not have been able to afford. On the whole, we feel mortgage debt is good debt.
What do you think? Is mortgage debt good, bad, or ugly? Do you think that there can truly be such a thing as good debt?
DC @ Young Adult Money says
atOh I definitely think it’s good debt. Like you said, if you bought a house for cash you aren’t leveraging your money at all. Additionally, it would take you years and years (perhaps decades) to lump sum buy a house.
cmf says
atI agree. Hard to imagine waiting ten years to save up to buy a home!
Ryan @ Impersonal Finance says
atAwesome points here Dee. Mortgage is the one debt I really don’t mind. I have been going back and forth between buying our next home outright or taking out a mortgage. Then a 15 or 30 year. I love the idea of being debt free, but I don’t know if I would be costing myself income from the alternative uses that capital has. Additionally, with inflation, the money would have more purchasing power today than it does in 30 years. There’s just a lot to consider. Thanks for giving me more to think about!
cmf says
atThat’s how we feel too about mortgages. We got a 10 year mortgage on our home and we are trying to pay it off early. You save thousands in interest if you get a shorter term- definitely look into a 15 or even a 10 year mortgage.
Kurt @ Money Counselor says
atIt all works until things go south. Maybe they never will, but if they do, look out! An equation always to keep in mind is Debt = Risk.
cmf says
atI hear you. I definitely think you have to make sure that your job is secure before taking out a mortgage. There are also events like the real estate bubble burst that can make life pretty miserable for people with mortgages. But of course it’s hard to predict things like that. You have to carefully evaluate your situation to decide what is right for you.
Jen @ Frugal Rules says
atWell, put that way, yes, you are right that mortgage can be good debt. However, I think one has to also make sure that there will be a well-secured source for payments because as you said, there are risks involved too.
cmf says
atWell said. As others have mentioned, there are always risks when you assume debt. You have to make sure that the risks are tolerable and it makes sense for you.
Becky @ RunFunDone says
atI’ve had a mortgage for 1 whole month now, so I feel that I’m an expert on the matter (just kidding…) I will say two positive things about a mortgage though: 1) My mortgage rate is lower than my return on other investments, so it makes most for me to have the mortgage, and invest my excess money. 2) Prior to paying my mortgage, I was paying my landlord quite a bit of money each month, so now at least my “rent” money goes to something that will be mine one day. I don’t particularly like being in debt, but in general, I don’t anticipate that my mortgage will be a great burden to me.
cmf says
atVery true. It’s still debt, but at least with mortgages the rates are low right now. Our investments are also returning a better percentage for us than we are paying in mortgage interest.
dojo says
atThere is no such thing as good debt. Having to pay the bank each and every month for months or years is not good. Having to worry about losing your job and losing your house is not good. Only after you’ve been debt free you can really see the benefits of having ALL your options open. From traveling extensively, to moving everywhere in the world, to having savings for the rainy days and really making plans.
Sure, there’s a difference between getting into debt for a diamond ring and for a house, but at the end of the day you OWE someone money.
We’re currently debt free and will probably never get any loans, but, if it was for a house, we’d make sure we save as much as possible and then pay off the debt as soon as possible.
cmf says
atI can appreciate that. We currently have 30 year mortgages on our two rentals, but for our current home (which we plan to keep forever) we got a 10 year mortgage and are paying it off early. We don’t particularly enjoy being in debt, but right now that debt is helping us achieve some financial goals. We are very much looking forward to being debt free one day. Kudos to you for being debt-free now! I think that’s completely awesome.
Laurie @thefrugalfarmer says
atThese mortgage discussions always intrigue me. I hate paying interest, so therefore, mortgages drive me nuts, but without them, it’s very difficult to get into real estate investing or own your own home. In my ideal world, we’d not have a home mortgage, but I’d be semi-okay with having a mortgage on a real estate investment property.
cmf says
atGreat point-you’d have to have massive amounts of cash lying around if you wanted to pay cash for a home and invest in real estate using cash. It would probably take you a very long time to do save that kind of money. You run the risk of missing out on years when your tenants could be paying off the mortgage for you!
Michelle says
atI tend to think of debt as only being good if it will return to you. In a sense mortgages can be good debt if home values actually rise when you need it to rise. For me, the only good debt I can see is student loans.
cmf says
atMortgages can also return money to you if you use them to invest in rental properties! The tenants in one of our rentals essentially pay the entire mortgage payment for us AND then after expenses they put something like $135 per month in our pocket after that! We think it’s pretty sweet, but being a landlord is not for everyone probably.
Green Money Stream says
atWe are aggressively paying down our mortgage debt. I know there are some out there who disagree with us, but personally I don’t think there is a “right” answer. It’s all about what works for you. We have an emergency fund, are investing our savings and don’t have any other debt. For me, having zero debt represents a sense of security and is a stop along the journey to financial freedom.
cmf says
atWe are paying our mortgage off early too. It’s actually at a low rate so I know others may think that’s not the “right” thing to do, but we are in the same boat as you: we have a solid emergency fund, quite a bit of investments for our age, and basically we just want to be rid of the mortgage! Looking forward to having it gone in 2015.
Sandy says
atI don’t think that mortgage debt is necessarily bad debt, when it gets bad is when people buy more house than they intended or than they need simply because they qualify for a bigger mortgage. I see that here in NYC all the time. Housing prices are already high but there’s this need to constantly upgrade to a bigger house.
cmf says
atOh yes, I totally agree with that! Mortgages can be a tool, but they can also be really abused, to the detriment of the mortgage holder sometimes. You definitely have to be careful and go into it with eyes wide open.
Stefanie @ The Broke and Beautiful Life says
atI can’t imagine having enough money for a downpayment let alone buying a home outright. Thank goodness for mortgages!
cmf says
atI know, right? There are plenty of people who may never be able to own a home, much less an investment property, if they could not take out a mortgage.
Jay@MoneyRebound says
atIt’s definitely a debt that most everyone has to deal with, also it’s not as bad as it sounds. If you can manage it properly and keep everything in order, it’s actually a good investment for the future.
cmf says
atI agree. I think as long as you make certain not to overextend yourself (meaning not take on too much debt or buy too much house), it’s a debt that many people manage well.
SuburbanFinance says
atWe see our mortgage debt as just that – debt. It’s “bad”, though not “ugly” because we have been able to use our mortgage to better our financial position through rental income.
cmf says
atI can understand that. Most people probably don’t want to ever have debt, but it’s not the worst thing to get in debt for…
Catherine says
atI also think its good debt. At the time of purchase you’re investing in an asset that appreciates. especially with interest rates less than 5%. my mortgage is the biggest debt i have but also the least interest. my financial focus in life is pay off non mortgage debt, retirement savings theb additional mortgage payments.
Dee says
atWe totally agree. If there were to ever be a good kind of debt, I think mortgage debt has got to be it for those reasons.
moneystepper says
atMortgage debt is good debt in my opinion, but ONLY if it is affordable. If you take out a mortgage where you monthly payments are 80% of your income, clearly this isn’t a good idea.
However, if you are sensible, mortgage interest will be less than the amount you’d pay to rent the property, and hence it is an “investment” compared to the alternative. Also, with rates currently this low, keeping mortgage debt and investing in the markets seems like a viable option to improve long-term wealth.
Dee S says
atThat’s how we tend to look at it too. It’s been overall mostly good debt for us, despite the fact that it is still debt.
MrRicket says
atThanks for your excellent articles as always, you truly inspire me.
I have started out my own blog to document my journey to Financial Freedom.
Thanks
MrRicket
http://myricketyroad.blogspot.com.mt/
Dee S says
atAwesome! Good for you!