Is there really such thing as “good debt”? Almost 85% of the world population is in debt, and at first consideration that may sound like a bad thing. However, debts can be either good or bad – depending on how you manage them.
Good debts come in the form of investments – such as educational plans, business loans, and mortgages. While these may be debts at present, in the long run there is a generally high probability of increase in value, which can contribute to overall financial health by generating higher returns. On the other hand, debts used to finance things that are consumed (such as clothing, luxury items, and vacations and holidays) do not increase in value over time or contribute to financial health. Any spending that cannot be replenished is considered a bad debt.
Mortgage Loans: a “Good Debt”
Mortgage loans can potentially generate high returns if you manage them well. Since housing loans are one of the lowest-rate loans you can get, there are many ways to maximize its returns – such as taking out an equity loan. In an equity loan, you use the equity in their home as collateral for the loan amount.
Many times, equity loans can help you to pay off existing, higher-interest debts or open up opportunities for highly lucrative endeavors.
An Equity Loan Case Study
Mr. Alvin decided to start a retail business with a group of friends. Although he was very confident about the potential success of his new business venture, he faced a shortage of investment capital. His company was not yet registered, and he was having a tough time finding funding and financing for his business plans. The only loan options available to him involved very high interest rates.
Luckily, Mr. Alvin chanced upon a SMP Mortgage Broker, who helped him explore the possibility of taking out a term loan on his existing home mortgage. In the end, he managed to secure a $200,000 loan on his mortgage due to increased property valuation, and this eventually helped him to realize his dream of starting his own business.
Here are the numbers behind Mr. Alvin’s equity loan:
|Loan To Value||
|Less: (Outstanding Loan Amount)||
|Equity Loan Amount||
For another example of how an equity loan helped another home owner, check out our Clients’ Stories.
Want to explore how an equity loan might open some doors for you? Engage an SMP Mortgage Broker today!