Majority of us thinks that taking on any debt is a bad idea. Well, it’s not, especially if you’ll look at it from the good versus bad debt perspective. Few are the debts that can be considered as good debt, and a home mortgage is one of these.
Here a piece of good news for those who want to avail a Pag-IBIG housing loan or any housing loan. They continuously worry whether to avail one without knowing that even the financial experts regard this as good debt, and for good reasons. Yes, obtaining a home loan is highly advisable.
Before we discuss these reasons, let’s talk about the difference between good debt and bad debt.
Good debt vs. bad debt
Debts are not created equal. Some are more manageable than others. When you use a manageable debt in purchasing an asset that would more likely to appreciate in value in the coming years, you are dealing with good debt.
The complete opposite – the purchase of an asset that would only depreciate in value quickly – is considered a bad debt.
Taking out a gadget loan such as a laptop that you may use for freelance work is a good debt. Purchasing a flat-screen TV to fill up space on your house is bad debt. The concept is as simple as that.
Going forward, a home mortgage is a good debt because of the following reasons.
Housing loan as a good debt
- A house and lot is a tangible asset
Getting a home loan with the goal of settling down in one place for good is always the right decision, whether you live solo or with your loved ones. You all need shelter, after all. This is especially true if you’ve been renting all your life. Rental fees are lost money.
Aside from that, a house is used 24/7 even when you go on vacation halfway across the globe. You will always come back here. And as already mentioned, while it is not guaranteed, the property will increase in value over time. You can always work on introducing timeless upgrades that may add value to the property.
- A home mortgage has lower interest rates
Compare the rates with that of the credit cards; mortgage loan interest rates are often lower. Nowadays, you may obtain a housing loan with as low as 4 percent fixed interest rate, a highly manageable interest. Since you are paying historically low monthly repayments, you will be able to pay a higher amount to the principal.
This builds home equity or the percentage of your homeownership. You may use this equity in availing more good debts such as home improvement loans, which, in turn, also drive the value of your property.
- A home loan has a true leverage
Leverage means using borrowed money with higher profit expectations than the interest payable. Mentioned already, paying consistently the monthly repayments build home equity that you may use as collateral to obtain more good debts or invest in the stock market, for instance. There are so many things you can do with your home equity.
Apart, the house itself has high earning potential whether you sell for a one-time profit or treat it is as an investment by turning it into a rental property. People should take advantage of low-interest rates to acquire properties as they can. A home mortgage can be refinanced too for a much lower rate.
While at it, please take note that too much of a bad thing can be debilitating. Also, while the article mentions acquiring more good debts that you can manage, there are instances when these good debts turn into bad ones. Case in point: missing a monthly repayment and incurring late fees and penalties. Avoid these debt cycle.
If you can focus on one good debt at a time, the better you will be, financially. That happens when you obtained the right kind of debt and used it properly. You may exploit this good debt to your long-term advantage. With this said, use your home mortgage, a good debt, in investing in future income, increasing net worth, and building the asset where you can anchor your retirement. And the best part? You still have your dream house!