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Is your home mortgage good debt?

August 3, 2010

Two classics - Cameron Fry and Georges Seurat

During a five-week art class one summer in college, I would sit in a darkened classroom on Tuesdays and Thursdays from 6 to 10 p.m. to watch slide after slide of pictures, trying to memorize the artist, year painted and name of each piece of art. I also would count how many times the professor would say, “good” in a four-hour time period. His personal record was 42, I still recall. 

I could really appreciate some of the older artwork, with pointillism being one of my favorite styles. I’m not sure if it was because of the movie “Ferris Bueller’s Day Off,” or just the painting, but “A Sunday Afternoon on the Island of La Grande Jatte” was one of my favorites.

When we got into modern art I was a little more confused. Some of the work looked like something my two-and-a-half-year-old daughter, Quincy, could draw. I guess what I learned is that usually beauty is in the eye of the beholder.

It is tough to say what is art and what is not. The same is true when it comes to personal finance. One might think that since it deals with numbers it is pretty cut and dry, right or wrong – but that is not always the case.

There are common factors with which most financial professionals agree. Credit card debt is bad debt, and you should try to get rid of it if you have it. It is important to diversify your portfolio. When you have more time to invest, you are able to take more risk to get more return. Although there is always an extremist opinion out there, most financial experts agree on these common beliefs.

There are some topics in personal finance that you can find a variety of experts supporting both sides of a position as well. One in particular is the idea of good debt, the most common of which is a home mortgage. This week we will look at the tale of the tape to see if a mortgage is good debt or bad debt.

There are some common arguments supporting a mortgage as being good debt. First, it allows many people to qualify for the “American Dream,” even if they do not have a lot of cash in the bank. Also, over the long term a home is an asset that usually increases in value. Therefore, when you take out a mortgage, eventually the house will be worth more than you borrowed to purchase it.

If you itemize your deductions, you can deduct your interest payments from your tax return. Also, by making a mortgage payment each month, as opposed to putting all your savings into your home, it frees up the rest of your income and savings to invest and yield a higher return.

On the other end of the spectrum you have people who believe you should pay off all your debt as quickly as possible, including your home mortgage. Some of the evidence this group uses is that only about a third of American taxpayers itemize their deductions, so many do not even get to take the mortgage interest tax break. Also, by keeping a mortgage for the deduction, you sometimes may be paying a lot in mortgage payments to save a little on your taxes.

Second, even though you may earn more investing, you do not know that, although you know you can earn a certain percentage – your mortgage – by paying it off early. Members of this camp also point out the psychological and mental benefits of paying off your mortgage. Think how your life would be different if you did not have to worry about that monthly mortgage payment. You have a roof over your head, free and clear.

If this were the case, would you sleep better at night? Would you pursue a dream? Would you use your income to save more and give more? Would you be happier and feel more liberated?

If you go straight by the numbers, I think you can consider a mortgage a good debt. If you go by personal feelings and a sense of security, I think it makes sense to try to pay your mortgage as quickly as possible.

Personally, my wife and I just refinanced our 30-year mortgage into a 15-year mortgage with a lower interest rate. There will not be a big difference in our monthly payment, and we will have our home paid off in half the time. We hope to even pay it off sooner, possibly in 10 years. If you have good credit and an interest rate more than 6.5percent on your mortgage, consider refinancing to pay off your mortgage sooner.

I hope I have illustrated how beauty is in the eye of the beholder, even on something as technical as personal finance. I hope you will examine your situation and decide what is important to you in the greatest piece of art you will make: your life.

You may not be the next Michelangelo, but if you are purposeful with your money, I think you will find abundant beauty in your life, and generations after you will benefit from your artful decisions.

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