What is Your Debt Perception?
Understanding the good and the bad
By Kyle A. Brocklebank
With so much information and advice from every source imaginable, making decisions pertaining to the best way to structure your debt can leave you confused.
Does this sound familiar? In today's lending environment there are many different products that can he utilized for every possible financial scenario. Consequently, it would take days to study and understand descriptions of each and their application. So for the sake of time and importance, we need to deal with the aspects of debt that have the greatest impact on our overall financial well being. To do this we need to be more comfortable with understanding types of debt rather than being familiar with various products.
Actually, to the surprise of many there are simply two basic types of debt: Good and Bad. Unfortunately, it's hard to think of debt in those terms, because we have been programmed to immediately classify all debt as bad. So regardless of how we obtained it or what it is used to acquire, the natural thought process is to eliminate it as quickly as possible.
To utilize an effective approach we must be willing to take an objective look at our other long term financial goals (retirement and/or children's education) which in many instances is seemingly impossible. Bringing us to one of the single biggest problems when making decisions on what is the best debt structure for each of us: the tendency to handle debt as a completely independent part of our overall financial situation. In fact, debt instruments combined with discipline can provide the benefit of increased net worth through proper leveraging.
Typically most can identify bad debt such as revolving credit card balances and knowing what we should do with them is simple. Since credit cards are easily attained unfortunately they have become a substitute for a cash reserve which in many cases leaves us with unintended balances. However, one of the ultimate truths that we are faced with is that we cannot have control over assets if we do not maintain control over our debts.
The term "Good Debt" is a more difficult to define, much less accept. The very notion that any debt could be considered good is generally against the very fiber of how most of us were raised. What would define a good debt? Good debts are long term and low interest obligations on appreciating assets. The most common examples are mortgages, home equity loans and home equity lines of credit. Which combination of the three makes the most sense for you? When analyzing and re-structuring good debts it is vital to take stock of our entire financial situation before making long term commitments on an appreciating asset.
To have a discussion around the acquisition of debt and efficient ways to leverage our dollars, there are certain assumptions that must be made relative to the net cost of the debt and opportunity cost of its utilization. If an individual in a 25% federal income tax bracket (not subject to income tax phase out) acquires a mortgage of $150,000 at 5.50% for 30 years the net cost to borrow is approximately 4.4%. If over time you average better than 4.4%, then it is more financially beneficial to leverage your dollars in areas that will yield the higher return. The problem is that while leveraging in this manner for most makes good financial sense, it is not necessarily emotionally comfortable for those who wish to be debt free at any cost.
The economy during the past 48 months has provided the lowest interest rates in over 40 years, and with consumers refinancing at a phenomenal pace, a full array of new and innovative mortgage products have been created.
Innovative programs and products can be helpful; however without practical application to our specific financial needs, they are useless. No matter which side of the argument you find yourself, to take an effective approach to debt structure, we must also be willing to take an objective look at our long term financial goals.
Kyle A. Brocklebank
is currently the Operations Manager
for Skylight Mortgage Company, LLC
He can be reached at:
1660 West 2nd Street, Suite 440
Cleveland, Ohio 44113
Phone: 216-589-0050
Fax: 216-274-9203
kyle@skylightmortgage.com
