How Mortgage Debt Differs From Other Types of Debt
Jul 22, 2022 5 minutes
- Not all debt is considered bad.
- Mortgage debt is viewed differently by lenders and credit scoring agencies than non-mortgage debt.
- Understanding the nuances between “good” and “bad” debts can help guide financial decisions in positive ways.
Is there such a thing as good debt? It might sound surprising, but not all debt is necessarily “bad.” One of the best examples of good debt is mortgage debt. When you take out a mortgage loan to buy a house, interest rates are low compared to other types of debt like credit cards or personal loans. What’s more, homeownership can improve your quality of life plus help you build wealth over time.
Understanding the difference between good and bad debt can help inform your financial decisions — and that distinction can guide investments in your financial future. Here are some key facts you need to know.
Is a mortgage considered debt?
A mortgage is a type of secured debt because the real estate you’re financing is used as collateral against the loan. Non-mortgage debt is any other type of debt that’s not secured by real estate, such as personal loans, student loans, auto loans and credit cards.
Most mortgages are home loans, which are commonly made to qualified borrowers for 15- or 30-year terms. Does a mortgage count as debt? It’s a form of installment debt, in which a fixed amount of money is borrowed and then repaid in regular installments, with interest, over a set period of time.
Does a mortgage show up on a credit report?
A mortgage is generally reported to the three major credit reporting agencies each month so it will appear on your credit report as long as your loan is serviced by a lender that reports to the bureaus. If the mortgage is paid off at a future date, the account will continue to show up on your credit report for up to 10 years from the date it was closed.
What is the difference between debt and a mortgage?
While a mortgage is a type of debt, it works a little differently than other types of non-mortgage loans. Here’s a quick comparison:
How Does Mortgage Debt Differ from Non-mortgage Debt?
Non-mortgage debt (personal loans, student loans, auto loans, credit cards)
Mostly higher interest rate
Lowest interest rate among most consumer loans
Can be either secured or unsecured
Always secured (backed by property)
Shorter loan terms
Longer loan terms
Minimum credit score requirements will vary, based on loan type and lender
Minimum credit score requirements generally range from 580 to 640, depending on whether the mortgage loan is government-backed or conventional
Why is a mortgage considered good debt?
A mortgage is considered good debt for several reasons. And homeownership comes with some important financial and personal perks. Here’s why:
- Low interest rates. Mortgages are usually the lowest-priced of all consumer loan types because they’re secured by property. Rates typically hover near the rate of inflation, but this is not always the case.
- Tax deductibility of interest paid. Taxpayers who itemize can deduct the interest they pay on home mortgages (up to a total debt of $750,000 for mortgages issued after 2017). That reduces taxable income — and therefore your total tax bill. The same deduction rules also apply to second mortgages — also known as home equity loans and home equity lines of credit (HELOCs).
- Benefits of homeownership. Taking out a mortgage helps you own a home and improve your quality of life — meaningful goals that most of us share. What’s more, owning vs. renting means you can alter or adjust things about a home to your liking whenever you want. And it might allow you to move into a better neighborhood or school district, or maybe cut your commute to work.
- Wealth-building asset. When you become a homebuyer, you’re making a stable investment that can appreciate over time and build equity. You’re also increasing your net worth.
- Viewed differently by credit bureaus than non-mortgage debt. Financing an asset that grows in value is seen as a positive by lenders and credit reporting agencies. And the ability to make a regular mortgage payment is perceived as a sign of responsible credit use.
Good debt vs. bad debt
Some types of debt are considered “better” than others and the distinction of whether they’re deemed “good” usually centers on benefits like these:
- Builds or improves your credit.
- Adds stability to your financial situation.
- Grows in value and gives you the opportunity to build wealth.
- Offers potential tax breaks.
- Produces a return on your investment.
On the flip side, there are many forms of debt that people call “bad” debt. It’s generally the kind of debt that’s considered not as helpful generally include potential risks like these that may works against you:
- Higher interest rates and less favorable terms, which increases your cost of borrowing.
- Borrowing to pay for something that decreases in value.
- Has unrealistic repayment plans.
- Borrowing for avoidable discretionary spending
- Raises your debt-to-income ratio too much.
Negatively affects your credit score.
Examples of good debt would include mortgages, home equity loans and HELOCs and, also to some extent, student loans. If you use a HELOC for home improvement, for example, you may still be able to deduct the interest if the money is used for improving your residence. HELOCs, just like your primary mortgage, are backed by your property. Student loans often come with lower interest rates and greater flexibility — plus investing in your education could boost your career opportunities and income (albeit at a cost).
Examples of “bad” debt could include longer-term auto loans (you’re buying a depreciating asset), credit cards (which levy high interest charges if balances are carried), certain kinds of personal loans and payday loans or title loans.
The Bottom Line
Not all debt is created equal. And the differences between good debt and bad debt aren’t always absolute. An unaffordable mortgage is probably a bad debt. On the other hand, a $900 loan to pay for your root canal is probably a good reason to borrow.
That said, having $100,000 in mortgage debt is very different from having $100,000 in credit card debt. The bottom line is that mortgage debt can deliver long-term financial gains at a lower cost of borrowing as you enjoy the benefits of homeownership and home value increases over time. Non-mortgage debt can also be beneficial if managed wisely, but it’s generally more costly and viewed less positively — and with higher risk — by lenders.
About the author
Nathan Foley questions everything — and thinks you should too. As Elevate’s resident mathematician, he pores over datasets to find the truth amid the fluff and translates insights into ideas for improving personal financial resilience.