Paying Down Debt: The Mortgage Should Be the Last Thing on the List
When trying to get out of debt, it is very important to consider what type of debt you have. Not all debt is created equal, and you should pay off the most detrimental debts first. This means that, by and large, your mortgage should be the last debt you actively try to pay off.
Good debt v. bad debt
Mortgage debt falls into two categories that make it more practical to pay it off last:
- “Good” debt.
- Low interest.
When deciding to aggressively pay off your debt, you need to order your debts according to advantage to you. First, you need to determine whether the debt is “good” or “bad.” Generally, “good” debt is debt that offers you some sort of long term benefit, a type of return, or a chance to recoup some of the expense. Of course, you should not overextend yourself with this type of debt, and you should borrow as little as possible. “Good” debt includes:
- Mortgage
- Education
- Car
Bad debt is debt that you get mainly to fulfill some immediate cash flow problem, or that you use to buy consumer items of little lasting value. Bad debt includes:
- Credit cards
- Payday and title loans
- Department store credit and rent-to-own
- Some home equity loan and line of credit arrangements
When ordering your debt, the mortgage, which is the “best” type of debt, should be paid off last. The other debts should be paid off first, helping you improve your credit score.
Interest rate
Your mortgage likely has the lowest interest rate. Even if it doesn’t, the interest rate is tax advantaged, so you are gaining some benefit. Other debts should be ordered according to the highest interest rate. That debt should be paid off first, and then you can move down the list.
The best way to pay off debt is to have a plan. It will help you keep on track — and you can arrange payment so that things work out in a way that is more advantageous to you.
Tags: home equity loan, good debt, home mortgage loan, mortgage,
pay mortgage, credit card, debt
