Two Examples of Good Debt
Posted on October 23, 2007 in the Money category
.I keep reading that all debt is bad. Suddenly debt , like trans-fats, have become uncool. But is all debt bad? I don’t believe so, and a recent Money article seems to agree with me. So what is a good debt? Here are two examples of good debt.
Buying a House
Buying a house with all cash is beyond the vast majority of Americans. So if you want to buy a house, you need to borrow in order to do so.
A 20% down payment used to be traditional and it helped buyers get the best mortgage deals. The booming real estate market changed traditional lending so that many home buyers could put down as little as 3% percent.
The problem with putting down such a small down payment is that you end up borrowing such a large amount of money that you end up with paying higher monthly mortgage bills, and you will have to pay for primary mortgage insurance (PMI), which protects the lender in the event you default.
Paying for College
When it comes to paying for your children’s education, allowing your children to take loans makes far more sense than liquidating or borrowing against your retirement fund. That’s because your kids have plenty of financial sources to draw on for college, but no one is going to give you a scholarship for your retirement. What’s more, a big 401(k) balance won’t count against you if you apply for financial aid since retirement savings are not counted as available assets.
It’s also unwise to borrow against your home to cover tuition. If you run into financial difficulties down the road, you risk losing the house.
That is why your best bet is to save what you can for your kids’ educations without compromising your own financial health and then let your kids borrow what you can’t provide.
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