This blog contains some simple tips and advice from two regular guys. We're not accountants, financial advisors, or brokers, so follow, ignore, or discuss our ideas as you see fit.

Wednesday, September 5, 2007

Is there such a thing as "good" debt?

Posted by Matt
As I've mentioned previously, I'm not crazy about debt. Who is, right? Wouldn't we all love to be debt-free? However, most people make an exception for that one special kind of "good debt": the home mortgage.

Now, I'll stipulate that mortgages are definitely better than other kinds of debt like credit cards, car loans or (shudder) payday loans, but I don't think that I can bring myself to call my mortgage "good". So, why do I have one?

We COULD have saved up and paid cash for a house, but that could easily have taken a decade or more and meanwhile we would have had nothing to show for all the money we'd be plowing into rent (gotta live somewhere). Plus, we're getting great tax deductions on the mortgage interest we pay. So, maybe I can classify mortgages as one of life's necessary evils.

What I'm still trying to figure out is how comfortable to get with the mortgage. We are lucky enough to have a little extra money each month and we're trying to decide whether to aggressively pre-pay the mortgage or not. It pains me to think of how much our house is actually going to cost with 30 years of interest added to the price if we stick to the standard schedule.

On the other hand, most financial guides I've read suggest that it only makes sense to pre-pay your mortgage if the interest rate you are paying is higher than the rate of return you could get if you invested the money. I see the logic at a high level, but I'm working on a spreadsheet to test that theory that incorporates lots of the little details and variables that sometimes get ignored when people try to come up with general guidelines (and yes, ignoring wind resistance did bother me in physics class).

I think that even if the numbers dictate that we are better off investing, I'd probably only do so until the investment account balance was higher than the mortgage balance and then I'd pay the mortgage off.

I WILL be completely debt-free SOMEDAY and I'm really looking forward to it!

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