Smart Quiz: Which Types of Debt Are Considered Healthy?
- Payday Loan
- Credit Card
- Cash Advance
- Home Mortgage
Answer: House Mortgage
Approximately 66 percent of American homeowners have mortgage debt. Taking on a large debt like a mortgage can seem overwhelming, but it comes with lots of benefits, mostly in the form of tax breaks. There may also be capital gains benefits if you ever decide to sell. It might also be the only time that your money works for you in terms of building equity.
The tax benefit of having a first mortgage or an equity line of credit has to do with the interest paid on it. All mortgage interest is tax deductible, including any points you pay at closing to reduce your interest rate. Considering the fact that mortgage payments are overwhelmingly interest-heavy for several years (like the first half of the term!), the savings can really add up.
Building equity is another reason a mortgage is considered a healthy form of debt. Equity is the difference between what your home is worth and how much you owe on it. You can borrow against your equity to pay for other things, like a college education or a car. Interest rates on an equity line of credit, or a second mortgage, are typically lower than auto or student loans and you can still deduct the interest. See how that circles back around? You can also use it to pay off those “bad” debts or remodel your home.
Depending on the value of the home and the neighborhood, you may net more money if you ever decide to sell. You may end up paying capital gains taxes, but if you lived in a home for two of the five years before you sell it, then up to $250,000 of the profit may end up being tax-free. Married couples can save even more.
Talk to a tax professional, financial advisor or accountant when making decisions based on tax benefits and deductions. They’ll be able to help you make the best choices for your unique situation.
~Here’s to Your Financial Health!