Good Debt vs Bad Debt: A Homeowner's Guide

As a homeowner, you've already made one of the biggest financial decisions of your life—taking on mortgage debt. But is your mortgage "good debt"? And what about that credit card balance or car loan?

Understanding the difference between good and bad debt can help you make smarter financial decisions and build long-term wealth.

What Makes Debt "Good"?

Good debt has three key characteristics:

1. Builds an asset that appreciates or generates income
2. Low interest rate (typically under 8%)
3. Tax advantages (interest may be deductible)

Examples of Good Debt

Mortgage Your home typically appreciates 3-5% annually while you build equity. Mortgage interest is often tax-deductible.

HELOC for Home Improvements Using home equity to increase your property value can yield 60-80% ROI on strategic renovations.

Investment Property Loans Rental properties generate income and appreciate, often outpacing the cost of borrowing.

Student Loans (Strategic) Education that leads to higher earning potential can pay for itself many times over.

Business Loans Debt that funds a profitable business venture creates wealth.

What Makes Debt "Bad"?

Bad debt typically:

1. Funds depreciating assets or consumption
2. High interest rates (15%+ APR)
3. No tax benefits

Examples of Bad Debt

Credit Card Debt At 20%+ APR, credit card debt costs you roughly $200/year for every $1,000 borrowed.

Payday Loans APRs often exceed 400%. These are almost never a good idea.

Car Loans (New Cars) New cars depreciate 20% the moment you drive off the lot. A $40,000 car becomes a $32,000 car instantly.

Personal Loans for Vacations Financing consumption that provides no lasting value.

The Gray Areas

Some debt falls in between:

Auto Loans (Used Cars) A reasonable loan on a reliable used car can be acceptable—transportation enables earning.

Medical Debt Often unavoidable, but worth negotiating or consolidating to lower rates.

0% Financing Offers Can be smart if you pay in full before the rate jumps—dangerous if you don't.

The Math: Good vs Bad Debt

Let's compare $50,000 in different debt types over 10 years:

The mortgage and HELOC leave you wealthier. The credit cards and car loan leave you poorer.

Converting Bad Debt to Better Debt

Here's where homeowners have an advantage. You can often convert high-interest bad debt into lower-interest, potentially deductible debt:

Option 1: HELOC Debt Consolidation

Convert 22% credit card debt to 8% HELOC debt. Save thousands in interest while potentially regaining tax deductibility.

Option 2: Cash-Out Refinance

Roll high-interest debt into your mortgage at current rates.

Option 3: Balance Transfer

Move credit card debt to a 0% introductory offer (short-term solution).

The Debt Hierarchy

If you have multiple debts, prioritize paying them off in this order:

1. Payday loans (400%+ APR)
2. Credit cards (15-25% APR)
3. Personal loans (8-15% APR)
4. Car loans (5-10% APR)
5. Student loans (4-7% APR)
6. Mortgage/HELOC (6-8% APR)

Smart Debt Strategies for Homeowners

Use Leverage Wisely

Your home equity is a powerful tool. Using it for value-adding improvements or consolidating high-interest debt is smart leverage.

Avoid Lifestyle Inflation

As your income grows, avoid taking on new debt for consumption. Instead, accelerate wealth-building debt payoff.

Maintain an Emergency Fund

Having 3-6 months expenses saved prevents taking on bad debt during emergencies.

Check Your Ratios

Keep total debt payments under 36% of gross income. Keep housing costs under 28%.

The Bottom Line

Good debt builds wealth. Bad debt destroys it. As a homeowner, you have access to tools—like HELOCs—that can help convert expensive bad debt into manageable good debt.

The goal isn't to be debt-free at any cost. It's to ensure every dollar of debt is working in your favor.

Take Action

Ready to convert high-interest debt into low-interest, potentially tax-advantaged debt? Learn how a HELOC can help or check your pre-qualification options.