Keeping Good Debt Can Net You More Money
Since inflation erodes the value of your existing finances , working to pay off only the entire mortgage may wind up costing consumers in the end. If a consumer has a $1,600 a month mortgage, the money will have about a third of its purchasing power in 30 years.
"You may be losing money in the long run," he said.
Instead, consumers should determine what types of debt is considered to be "good debt," which is debt that is at a low, fixed rate and preferably tax deductible, Chadwick said.
"If you can make monthly payments and still have enough money left over to save for retirement needs, it may not be in your best interest to pay that debt off too quickly," he said. "It does not need to be tax deductible to be good debt, but we consider that the icing on the cake."
Determining which debt needs to be paid down first can be determined by whether or not a consumer is "earning more on his or her money than he or she is paying on the debt," Chadwick said.
The underlying asset should be taken into account since the debt accrued for some cars and homes winds up being a loss if the asset is a "money pit," he said.
Deciding when to pay off a mortgage can be tricky, but Chadwick advises consumers to avoid paying off a mortgage if the rate is low.
"People are safer having a mortgage and an equal or larger amount of money accessible to them," he said. "This is a psychological exercise, not an economic one."
Contrary to popular belief, homeowners need to recognize that "the bank controls the equity in a home, not the owner," Chadwick said.
Mortgage debt is misunderstood by most people who often try to pay their house off as soon as they can be making extra payments or by obtaining 15-year mortgages, said David Shucavage, president of Carolina Estate Planners in Wilmington, N.C.
The issue that commonly arises is whether the money invested in your home is safe since value of the house can decrease and the equity is not liquid, he said.
"The houses they foreclose on first are the ones with the most equity because they can sell them at a lower price and still get their money out, so money in a house is not really safe" said Shucavage.
The rate of return on a house can be zero even if the value of the house is increasing since the money itself does not earn any interest, he said.