Though we are often taught that debt is bad, even on this website, in some cases, it may actually make sense to retain a debt, especially if the alternative costs more. For example, it does not make sense to drain all of your financial resources paying your mortgage off, if you know that if anything goes wrong, you will incur high interest credit card debt.
In other cases, it simply isn’t feasible to pay cash for large purchases, like a home or college. In fact, in these situations, debt may actually be beneficial to your financial picture.
In the majority of cases, you will not have the cash to purchase your home outright. You have to carefully consider how much money you can afford to put down and also how much home you can comfortably pay for. Obviously, the more money that you put down upfront, the less you will pay in interest and for your home.
But before you rush to drain your cash reserves and put down every available cent to cut the interest payments on your mortgage, you will need to consider other financial issues. Since mortgage rates are typically a lot lower than interest rates on other debt, using all of your available cash towards purchasing your home is not always a wise decision.
Traditionally prospective homeowners put down a 20 percent down payment in order to get the best mortgage deals. However, in a booming housing market, prospective homeowners are wooed by low down payment and no down payment home loans. It is important to remember, though, that the less you put down the higher your monthly mortgage payment will be and he more you will pay in PMI.
So it makes sense to not pour all of your cash into a home, especially if you will end up with credit card or other personal debt, because the interest payments on mortgages tend to be lower than the interest payments on other debts. Plus, you can deduct the interest on your mortgage when you file your yearly taxes.
When it comes to paying for you child’s college education, it makes more financial sense to allow your children to borrow for college rather than to borrow against your retirement. In this case, your children have numerous financial resources available to pay for college, such as student loans and scholarships, often at discounted rates. However, when your retirement funds are gone, they are gone.
Also, your retirement funds are not considered when applying for financial aid for your child’s education. This is why using federal loan programs for your child’s education makes better financial sense than borrowing against your retirement.
Many people consider borrowing against the equity in their homes to pay for college. This is not recommended, because you risk losing your home if you run into financial difficulties.
It is always best, of course, to try to save for your child’s education. Then your child can borrow the portion that you cannot pay. Student loans have guaranteed low interest rates and no payments are due until after graduation, which a big plus when considering financing options for college.
Depending on the situation, sometimes debt makes sense financially. Debt such as mortgages and educational loans often cost less than other financial debt. In these cases, it may be wiser to borrow than to drain all of your financial resources. Becoming debt free is an admirable goal, but not at the cost of all of your resources.