You have heard us say many times that unnecessary or too much debt is almost always not in your best interest but that some debt is a common part of life and is often necessary, useful and even beneficial.
If you are pursuing education or training, need a truck or car for work, require a medical procedure, have an expensive repair to make or an appliance to replace, need equipment for your farm or business, desire to own a home to live in or for many other valid reasons, a loan is often your best (or only) alternative.
Everyone should have a regular savings plan to build toward your ultimate future financial independence but sometimes life steps in with a financial need before you reach that goal and that is where a loan can make life possible.
Perhaps the best example of one kind of debt that is beneficial and can ultimately lead to a better life and financial independence is a home mortgage.
Here are some reasons why mortgages stand out from other types of loans:
1.) Having a mortgage can improve your credit score. While paying back other loans on time can also help your credit score, Mortgages are seen as “good debt” by creditors. Because it’s secured by the value of your house, lenders see your ability to maintain mortgage payments as a sign of responsible credit use. They also see home ownership as a sign of financial stability. Your improved credit score can mean a lower interest rate on a car loan, credit card or for various other benefits. Some employers even check the credit scores of job applicants before hiring them to see if they handle their finances well.
2.) It’s one of the lowest interest rate loans you’ll ever get. Mortgage loans are among the safest types of loans that lending institutions can make. The home is collateral for the loan and people want to maintain their home. With low risk of default, lenders can lend at very low rates compared to other loans. 15 year loans may cost a few dollars more per month than a 30 year loan but rates are even lower and pays off in half the time for less than half the interest of a 30 year loan. Five Star offers both options.
3.) It’s an effective way to build wealth. Unless you live for free with someone else, you are going to have to pay to live somewhere. Paying for a home each month gives you a place to live, gradually pays off the loan (the equity is yours) and most homes grow in value over time. At the end of the 15 or 30 years, you own the full increased value of the place you live in. That is great wealth building and retirement savings. Of course, you can always build equity and sell a home and move to a bigger or smaller home that better suits your needs at that stage of your life.