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?