Debts are not always a bad thing. As a matter of fact, there are cases where the leveraging power of loans actually helps to put individuals in a better financial position. Here are some of these instances.
Purchasing a house
The chance that people can pay for a new house in cash is slim to none. Individuals need to consider how much they can afford to put down and how much mortgage they can carry. The more the borrower puts down, the less they will owe, and the less they will pay in rates in the long run.
Although it may seem pretty logical to spend all available dimes to cut their interest payments, it is not always the right move. Individuals need to consider other problems like their need for fund reserves and what their investments are earning. Not only that, do not pour all your funds into a house if you have other forms of debts.
Most of the time, loans have lower interest rates compared to other obligations, and people may deduct the interest they pay on the first million dollars of the mortgage loan. If the loan has a high interest rate, borrowers can always refinance later or until the rate falls down.
Use a mortgage calculator to know how much you can save. A 20% down payment is usually the tradition, and it can help the buyer get a suitable mortgage deal for their needs. A lot of homebuyers put down less – 3% to 5% of the down payment in some cases.
But if this happens, the buyers will end up paying a higher monthly mortgage bill since they are borrowing more funds, and they will have to spend money for the PMI or Primary Mortgage Insurance. PMIs will protect the lending institution in case the borrower cannot pay the debt.
Paying for college tuition
When it comes to paying for a student’s education, allowing students to get a loan makes more sense compared to borrowing or liquidating the parent’s retirement funds. That is because children have a lot of financial sources to draw on to pay off their college tuition, but no one is going to provide parents scholarships for their retirement.
What is more, a huge 401K balance will not count against students if they apply for financial aid because retirement savings are not counted as available assets. It is also foolish to borrow against the house to cover the tuition fees. If the borrower runs into financial problems down the road, they risk losing the property.
People’s best bet is to save what they can for their children’s educations without undermining or damaging their own financial stability. Then let the children borrow what the parents can’t provide, especially if the kid is eligible for government-backed loans, which are based on their needs.
These kinds of loans have guaranteed low interest rates. The payments will not be paid until the student has graduated, and the interest rate paid can be deducted from the student’s taxes under some instances.
Financing a vehicle
It makes a lot of sense to pay for a vehicle right away if you are planning to keep it longer than the term of high-interest loans or a pricey lease or until it dies. It is also good to use cash if the money is unlikely to earn more investment than what the person would pay in interest.
But a lot of individuals cannot afford to spend 100% of the money they have at hand. So the goal is to spend as much as possible without compromising other financial goals, as well as emergency funds. Usually, people will not be able to get a car forbrukslån without paying at least 10% of the total amount of the vehicle.
A mortgage makes most sense if the person wants to purchase a new vehicle and plan to keep driving it even after the mortgage payments have stopped. People may be tempted to use home equity loans when purchasing vehicles since they are likely to get lower rates compared to auto loans, and the rate can be deducted from their annual tax. But individuals need to make sure that they can afford the monthly payments. If the person defaults, they can lose their properties. Leasing a vehicle might be the best choice if the following applies:
The person wants a new vehicle every three years; they want to avoid down payments of 10% to 20%
They do not drive more than 15,000 miles per year (which is the allowed mileage in most leases)
They keep their cars in good condition so that they avoid penalties when the lease ends.
Making home improvements
Taking home equity mortgages or line of credit makes a lot of sense if the borrower is making home repairs or improvements that can increase the value of their house, like adding a new family room, renovating the living room, or renovating the kitchen.
The rate the homeowner pay in some cases is deductible, and they increase their equity. But if the project does not boost the house’s value, property owners can consider paying cash or taking out low-interest, short-term mortgages that will be paid in five years, even less. Usually, it is best to pay upfront for appliances and furniture since they do not add value to the property, and these things are considered depreciating assets.
Paying off debts from credit cards
If the person is saddled with tons of debt from high-interest credit cards, they might be tempted to disburse it quickly by borrowing from their 401K or taking out home equity loans. There are two main advantages of home equity loans. They usually charge interest that is less than half what most cards will charge. Not only that, the interest people pay may be deductible.
But if people use home equity loans for expenses not related to housing, they may only deduct the interest paid on the first couple of dollars on the loan. But there’s one possible and a very important disadvantage when people borrow against their houses to pay off the cards. If they default on their equity loan payments, they may lose their property.