A Different Way to Look at Debt

There’s often conversations about debt being good or bad. But really, debt is just debt. It has no emotions and you’re the person who’s in control of it.

I read a comment recently that rephrased this good vs. evil debt mentality in the most perfect way: debt is not good or bad – it is profitable or unprofitable.

Student Loan Debt
I’ve personally never had any student loan debt so I don’t know what it feels like it to have it hovering over my head. But going through the theory of profitable vs. unprofitable debt student loans could fall into either.

Your student loan debt is profitable if:

    Your degree helps you land a job that pays higher than you could get without a degree. (Because we know that not all degrees are going to score you a high paying job.)
    You use your student loans to pay for tuition and related expenses.

If you’ve used your student loan debt to finance a lifestyle that you shouldn’t be living right now then your student debts are not profitable.

Use your student loans to advance your career, earn decent money, and only use them to pay for necessary college expenses and you’re looking at profitable debt.

Consumer Debt

Consumer debt is the absolute most unprofitable debt that you can have. If you’re using credit cards and other personal loans to finance your life you’re living beyond your means and are setting yourself up for financial disaster.

Stay away from this type of debt.

Mortgage Debt

Mortgage debt is a big toss-up. If you plan on living in one place all of your life, purchasing a house may save you money in the long run over renting.

However, if you’re not staying in one place forever and at some point need to sell your home you could lose a lot of money if housing prices drop. OR you could make a small profit when it came time to sell.

Mortgage debt is one that comes down to individual circumstances although I would argue that it definitely leans more toward the unprofitable side of the equation.

Investments

Debt becomes the most useful when it comes to investing. Many investors have built their wealth by leveraging debt and purchasing real estate.

Other ways to use debt to its advantage is when you’re investing in yourself in a way that produces tangible results or using that money to grow your business.

Bottom line: debt isn’t good or evil. When you intentionally use it to its advantage it can be a tool for building wealth. If you use it in an irresponsible way it can be a path to financial disaster.

source: everybodylovesyourmoney.com

Is a Second Mortgage a Good Idea?

To many home buyers the idea of taking out two mortgages on the same house sounds frightening. However, a second mortgage—also known as a second trust junior lien—makes good sense in the right circumstances and can actually save you money.

A second mortgage is simply a loan secured against your property as collateral. The term “second” indicates that the loan does not have priority on your home in case you default. Should that happen, your first mortgage has priority and that loan would be paid off before any funds go towards the second mortgage.

As a result, second mortgages come with higher interest rates than first mortgages. Second loans require fees and closing costs, just like first mortgages. You may also be required to pay points (one point is equal to one percent of the loan value) which could make the loan less attractive. You’ll need a good credit score and documentation for enough income to make the payments.

Three popular ways buyers and homeowners save money with second mortgages:

Avoiding private mortgage insurance. Buyers lacking a large down payment can use a second mortgage to qualify for their first mortgage without having to pay expensive private mortgage insurance.

Staying within GSE loan limits. With prices rising in the nation’s more expensive markets, buyers can buy a home that exceeds the limits for a loan to be bought by Fannie Mae, Freddie Mac or Ginnie Mae without incurring the higher interest rates of a jumbo loan. That translates into a significantly lower rate of interest on the primary loan.

Consolidating high interest consumer debt. Some homeowners pay off high interest short term debt like credit cards with lower interest, long term debt through a second mortgage.

Additionally, taxpayers in higher tax brackets get to deduct the interest they pay on both mortgages on their federal and state returns.


However, second mortgages have their risks:

• By taking out a second mortgage, you are adding to your overall debt burden. Anytime you add on to your overall debt burden, you make yourself more vulnerable in case you then experience financial difficulties that affect your ability to repay your debts.
• If you cannot repay, you could potentially lose your home because you are using the equity in your home as collateral.
• If you are consolidating debt, it’s not wise to substitute short term debt for long term debt if you end up paying more over the life of the second mortgage.

 source: totalmortgage.com