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77% of American Households Are in Debt. Here's Why That's Not Necessarily Bad News

A woman kissing a man on the cheek while he holds up house keys.

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The vast majority of Americans are in debt. In 2022, 77.4% of consumers had some kind of outstanding loan, according to the Federal Reserve. This may sound like bad news, but it really isn't. Here's why.

Being in debt isn't necessarily a bad thing -- it depends on the kind of debt

To understand why it's not necessarily a problem that so many Americans are in debt, it's helpful to look at exactly what we collectively owe.

In 2022, 42.2% of Americans had debt secured by their primary residence and another 4.4% had debt secured by some other kind of residential property. In other words, a good amount of this debt is mortgage debt.

By contrast, around 36.9% had vehicle loans, 45.5% had credit cards, and 10.5% had other installment loans. So, other than credit cards, mortgage debt is the most common type of household debt -- and mortgages account for the largest amount of outstanding debt by far.

The fact that so many people happen to have a loan on their home is not necessarily a bad thing, because mortgage debt is usually considered as good debt.

Here's why mortgage debt isn't typically a problem

Owing money on a mortgage is a bit different from having other loan balances.

First, mortgage debt tends to generally come with pretty affordable interest rates. While rates are higher now than they have been in years, many people have outstanding mortgages with rates in the 3%-4% range. That's a very affordable interest rate -- especially when you consider that mortgage interest is deductible on your taxes on loans up to $750,000 if you itemize.

So, those with mortgages may be paying a low rate and may even have that interest subsidized by the government. Because of that, it often makes sense to borrow to buy a home rather than paying cash for one -- even if you could afford to. You can get a better rate of return with other investments with your extra cash instead of using it to buy a house.

The other big reason why mortgage debt isn't like other debt is because it's secured by a house. If you have a mortgage, that means you own your own home. And owning your own house can be a good way to build wealth. Your net worth will go up in value as your property value increases -- and sometimes, if you live in the right place and bought at the right time, you can make a significant amount of money as property values rise.

Even if your home doesn't end up with a skyrocketing price tag, owning your own home can still help you build wealth because each mortgage payment helps you acquire a valuable asset. That's not true for most other kinds of debt payments.

So, while it's true a lot of Americans owe money, this isn't necessarily something to worry about because so much of it is mortgage debt. For those with outstanding balances on credit cards, though, that debt can be very expensive and often does nothing to help increase your net worth. If you owe money on your cards, make a plan to pay it off ASAP either by making extra payments or by reducing your interest rate with a balance transfer, or both.

Will your mortgage help you or hurt you?

While mortgage debt isn't a bad thing in most cases, you need to make sure buying a house is the right choice for you before jumping into borrowing for one. To do this:

  • Don't spend too much: Aim to ensure your housing costs, including your mortgage and other expenses, are less than 25% of your household income.
  • Make sure you're committed to staying in your home for a while: You typically don't want to buy a home if you plan to move in the first five years or so as you likely won't see your property go up in value enough to cover the transaction costs.
  • Make sure you can qualify for a mortgage at a good rate: You'll typically want a credit score above 700 to get the best loan rates and ensure you aren't overpaying for a loan.
  • Save a down payment: If you can save up a 20% down payment, you can avoid added costs of mortgage insurance that is needed to protect the lender. If you can't save that much, try to have at least 10% down.

If you are in a good financial position to buy and can qualify for a mortgage at a reasonable rate for a home you can afford, then a mortgage could very well be a good thing for your financial life and not a debt you have to worry about.

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