Savvy consumers have an understanding of their overall financial situation and their potential buying power. They generally keep track of their consumer credit report information and validate that all the details contained there are accurate. Despite a general knowledge of credit, many consumers are still uncertain about carrying financial debt’s importance and potential impact. Consumers may have heard terms such as good debt, and they become confused about how things like mortgages affect their situation.
When a borrower qualifies for a mortgage loan, their creditworthiness continues to be an important factor during the lifetime of their mortgage. Monthly payments made on time carry weight with credit bureaus and potential lenders. However, this consistent payment history also impacts the creditworthiness of the borrower in another way. A mortgage loan is essentially a tradable debt instrument, and when the loan remains in good standing, it is a more viable investment.
A Look at Good Debt
Any borrower might question how owing money can be a good thing, but consumer debt has a certain logic. Mortgage and student loan debt, for example, are considered positive features of a consumer credit report. Mortgage balances and their payment history represent a solid payment history and real property that will likely grow in value. As the equity value of a home increases, so does the net worth of a consumer. Student loan debt is considered a positive feature because it points to higher earning potential in the future. Other unsecured debts that do not add value to a consumer report include personal loans and revolving lines of credit.
Net Worth and Purchasing Power
Now that we have discussed the basic thought process behind good debt and regular debt, we can consider how having a mortgage can impact your personal debt. The most obvious factor is that a new mortgage or one with a relatively high balance compared to your current income and the original loan balance will limit new borrowing opportunities. However, owning a property increases your overall net worth and creates collateral that can be used for future loan security. Also, as the mortgage balance decreases and your income increases, the overall purchasing power will naturally increase as well.