Image source: Getty Images
Sure, debt can be dangerous -- to companies and individuals alike. But there are different kinds of debt. While credit card debt, often featuring interest rates of 25% or more, can be especially lethal to individuals, other kinds of debt are not so bad -- and are sometimes savvy moves.
Selena Maranjian: Taking on mortgage debt, for example, is often a reasonable, if not smart, move. That's partly because interest rates are so low these days, with the national average for a 30-year fixed loan recently around 3.7%. Back in the 1980s, interest rates were largely in the double digits -- and even high teens at various points. Check out this example: If you borrow $200,000 with a 30-year fixed mortgage and an interest rate of 3.7%, our mortgage calculator estimates your monthly payments will be around $921. Make that interest rate 13.70%, though, and they soar to $2,322! (Even at a more earth-bound 7%, the payments will be substantially higher, at $1,331. Current rates are compelling.
That's not enough of a reason to take on a mortgage, though. Other good reasons to own a home include having no landlord or rent increases to deal with, being able to take advantage of mortgage-interest deductions, building home equity, being able to remodel it to suit your desires, being able to take mortgage-interest deductions, and having the chance of your home's value appreciating over time.
If you're thinking of getting a mortgage, be sure to learn more about them and how to choose the kind that will serve you best. Think through whether you really want to buy a home, too, as there are some downsides, such as maintenance and repair expenses, tax and insurance expenses, and the fact that you will have a lot of money tied up in an asset that might not always be easy to sell.
Brian Stoffel: I am not a fan of taking on huge amounts of debt to go to college. More than a decade removed from graduating, I now believe Will Hunting -- Matt Damon's character from Good Will Hunting -- was on to something when he said: "You dropped $150,000 on an ... education you could have got for $1.50 in late charges at the public library!"
But there are limits to this view. The statistics are clear: Those with a college degree earn more -- and are more gainfully employed -- than those without:
Data source: Bureau of Labor Statistics
So while it might not make sense to take out $100,000 in loans to go to a private college, it is worth pursuing some form of higher education. For many lower-, middle-, and working-class youth, that's going to mean taking out loans.
I would suggest, however, that they consider the plan laid out by fellow Fool Morgan Housel: Work for a year after high school while living at home, save the money you earn, go to a two-year school to earn your associate's degree and take care of your general education requirements, and then transfer to a four-year state school to get your bachelor's degree. You'll pay a fraction of the price your fellow grads have, but leave with the same diploma.
Be sure the debt you take on has a sensible purpose. Image source: Getty Images.
Matt Frankel: I agree with Selena and Brian and would even go so far as to say mortgages and student loan debt are the two most financially advantageous types of debt for most people to have. I'd like to add home equity loans to the list, but only under certain circumstances.
First, a home equity loan or line of credit can be a good form of debt to have if it's used in a way that it adds significant value to your home. For example, according to Remodeling magazine's "2016 Cost vs. Value Report," adding a stone veneer to your home's exterior costs an average of $7,519, but almost 93% will be recouped in the form of increased home equity. And, just like the home itself, the equity created by the project should increase in value over time.
Or, even if the value creation is on the lower end of the spectrum, a home equity loan can still be a good form of debt to take on if it helps you sell your house quicker. Let's say that you're trying to sell your house, but you have a kitchen that is straight out of the 1970s that's turning off buyers. Even though you can expect to recoup only about 65% of the cost of a kitchen remodel, it could be well worth it if it results in a quick sale.
As a final thought, not all home equity loans represent "good" debt. Tapping your home's equity to do a renovation project or even to pay for college expenses is one thing. Using it to finance a vacation or to buy a boat is something else entirely. Use your own judgment, as home equity debt can be good or bad, depending on how it's used.
In general, think carefully through the decision to take on any debt. Weigh what you'll get for the debt -- a new home, an education, a valuable remodeling, or something else -- against the cost of the debt. Think about what else you might do with that money, instead.
