IS YOUR HOME BAD DEBT?

I have never truly understood the term “Bad Debt.” It seems to me that all debt is bad, I mean, really is there such a thing as “Good Debt?” Now don’t get me wrong, I understand that there may always be a degree of “Necessary Debt” but “Good?” Typically a debt is considered “Good” if it leads to a better financial situation. Truth be told, outside of a Mortgage or Student Loan what kind of debt can help improve your finances in the long run? But, here is the rub: Sometimes, even “Good Debt” can be bad.

For too many Utah Homeowners our homes have become “Bad Debt.” I guess the simple rule of thumb is to determine if you are paying more for your home than you should. For many that is a hard thing to determine. Here are 3 things to consider when determining if you are paying too much for your home, in other words, 3 reasons why your home is BAD DEBT:

1. TOO MUCH OF MY MONEY GOES TO MY HOME: Experts say that our house payment should not exceed 36% of or Gross Monthly Income. That means that a homeowner earning a Gross Amount of $6,000 per month should have a house payment that is no more than $2,100 per month (You can get a whole lot of house for two grand a month). If you are paying over 36% then you are most likely unable to put money into other places, such as eliminating Unnecessary Debt or establishing a Savings.
2. MY INTEREST RATE IS TOO HIGH: Interest Rates effect our monthly payments, it really is that simple. I have always said that when considering refinancing it is the Fee’s that matter most, not the interest rate. I hold to my statement. However, I am still amazed at how many people tell me that they are unwilling to refinance to a lower rate without “significant” changes. What does that mean? To many a savings of $100 per month, which in many cases can mean as little as a .25% drop in rate is the difference between living off credit cards and having money to spare. There is no magic formula for determining if your rate is too high. Take a look at your budget, determine how much you need to save—at a minimum—to get where you want financially and then see what rate you need in order to make that a reality.
3. BAD USE OF MY EQUITY: Home Equity provides a false sense of security. I don’t care if you have 90% equity or 5% equity, you miss your payments you will loose your house. You loose your job, good luck accessing that equity without selling your home. Problem is, too many people have gone to the other extreme and are relying on equity as if it is a never ending vault of emergency funds. If you are using a line of credit for your expenses, or to pay off your car then you are going the wrong direction. Equity should be used to increase the value or marketability of your home. Using equity to pay off high interest debt may be a wise decision, however, using equity to afford a week in Fiji is just plain wrong.
   

My experience has taught me that by simply reviewing those three areas of our home finances we can go a long way to determining if we are using our home debt wisely or not.

Again, I realize there is such as thing as “Necessary Debt” and for most this should be limited to our homes, our education, and in some cases our car. Unfortunately, if is possible to use the concept of “Good Debt” as an excuse to avoid disciplined budgeting and wise financial analysis. If you think your home may represent Bad Debt, call me, let’s get it straightened out.