There seem to be two major groups of people in this world: people who believe in good debt and bad debt and those who hate debt altogether. Then there is me. While I am a huge fan of understanding the long-term benefits of going into debt, I also know that I hate debt with a passion. For this very basic reason, I consider myself torn between the classic understanding of holding a mortgage on a property and avoiding debt at all costs.
Why Some Distinguish between Good Debt and Bad Debt
For those who are unfamiliar with the common distinction between good debt and bad debt, it’s really quite simple. Good debt is that which will have a larger benefit in the long run. In other words, it is a huge benefit to you to take out this loan. Bad debt would be everything else. Things like consumer debt that provide no long-term benefit and usually are a huge mistake. This is an important distinction because it reminds us that leveraging your money can be a good thing.
Is Real Estate Debt a Good Thing?
The question remains then, is buying a home with a mortgage one of those instances where it pays to take out a loan? Can taking out a mortgage put you in a better financial position in the future because of this action? The short answer to these questions is yes. Here’s the long answer…
The alternative to getting a mortgage is to EITHER continue to rent for your entire life OR to wait until you have enough money saved up to buy a home outright. While this may be an option for many people who live in an inexpensive area of the country, for most of us close to major cities, it would take a decade of aggressively saving to afford a basic home with cash. In that regard, taking out a NPBS fixed rate mortgage would help you speed up the process of getting into your home. By getting in your home earlier, you not only can enjoy the lifestyle that you want, but you can avoid wasting money for rent.
On top of these benefits, owning a home gives you an asset that will likely appreciate over the long-term. This is what real estate investors refer to as leverage. In other words, by taking a mortgage, you are using a small amount of money (down payment) to generate a larger return (inflation on the entire value of the home). It’s not something that you should get carried away with or justify to buy a more expensive home than you can afford, but it is something to take into consideration.
While I know that some people will disagree with my stance towards taking out a mortgage, if you do it correctly and minimize the risk involved, it can be a great asset to solidify your financial position.