Did you know there’s such thing as “good debt?” I’ve got a low-rate (2.45%) mortgage and 0% car loan at the momentito, and we’re going to dive deep into why this is to my advantage.
📌 TLDR
| Situation | Typical “Pay It Off” Instinct | What “Good Debt” Means | Why it Can Be Smarter |
| 2-3% Mortgage | Throw extra cash at the principal | Keep the loan, invest the cash | Historical equity returns ≈ 7-10% (real), tax-deductible interest |
| 0% Car Loan | Finish the balance early | Use the cash to fund a diversified portfolio | Zero financial cost + potential market gains |
| High-Rate Credit Card (15%+) | Ignore it, keep paying | Pay it off ASAP | Interest > expected market returns; this is bad debt |
Hungry for more detail?
Debt Isn’t a One-Size-Fits-All Concept
When you hear the word “debt,” you probably picture a credit card bill or a payday loan – high-interest obligations that erode your net worth quickly. Those are bad debt, and they should be tackled head-on.
But a 2.45% mortgage or a 0% promotional auto loan lives in a completely different universe. The cost of borrowing is so low that the money you’d otherwise use to pay it down can be redeployed into investments that, over the long run, have a higher expected return.
Like I said, this is the case for me: hubby and I were fortunate to lock in a 2.45% mortgage rate during the pandemic (though I could write an entire post just on the stress of purchasing a home during said pandemic), and I have a 0% loan on my vehicle.
Yes, I know you hate me.
Example: $50,000 over 10 years
| Scenario | Ending Balance* |
| Pay extra mortgage – invest $0 | $0 (You have paid down the loan) |
| Invest the $50k at an 8% annual return – keep the mortgage | ≈ $108,000 (plus you still own the house) |
| Pay off 0% car loan, invest remainder at 8% | Same math – the loan disappears, the portfolio grows |
The math shows that, all else equal, the investment path yields a net gain far exceeding the cost of keeping the low-rate loan.
Why Low-Rate Debt Can be “Good”
Tax Benefits
- Mortgage interest is deductible (or you get a credit ) on mortgages up to $750K (for joint filers), which lowers the effective rate.
- The net after-tax cost often drops below 2% of a 2.45% loan (because of deducting the interest), further widening the gap between borrowing cost and expected market return.
Liquidity and Flexibility
Money left in an investment account can be accessed (subject to market conditions and tax implications) for emergencies, home improvements, or other opportunities, unlike equity tied up in a home you can’t quickly liquidate without taking out a home equity line of credit (HELOC) or flat-out selling. Though there are schools of thought that would use a HELOC as investment funding since the interest is a tax deduction if used as “acquisition debt,” which is to buy, build or substantially improve the home that secures the loan. Otherwise, the interest is not deductible.
Leverage Amplifies Returns
Using borrowed money to purchase an appreciated asset (e.g. a home, rental property, or even a diversified stock portfolio) can magnify gains, pwovided the asset’s return exceeds the borrowing cost.
Inflation Shield
Fixed-rate debt becomes cheaper in real terms as inflation rises. If you lock in a 2.45% rate today (though we are not currently seeing mortgage rates this low), a 3% inflation environment effectively reduces your real interest expense to -0.55%.
You get all this straight, Gladys, and you could really maximize them dollars!
Risks & Guardrails
| Risk | What it Looks Like | Mitigation |
| Market Volatility | Portfolio value drops, leaving you “stuck” with debt | Keep an emergency fund (3-6 months of expenses) outside the investment account |
| Rate Changes (if you refinance) | Future higher rates could erode advantage | Lock in a fixed rate, or refinance only if the new rate remains low relative to expected returns |
| Liquidity Crunch | Need cash, but assets are illiquid or down | Maintain a mix of liquid (ETFs, index funds) and less-liquid (real estate, private equity) investments |
| Behavioral Pitfalls | Overconfidence, taking on too much leverage | Set a clear target debt-to-net-worth ratio (e.g. mortgage ≤ 1 x net worth) |
A Balanced Takeaway
- Not all debt is the same
- Low-interest, fixed-rate loans can be a strategic tool for wealth building when paired with disciplined investing
- High-interest, revolving balances are still the enemy – they should be eliminated first
In the end, the decision hinges on numbers, not emotions. If the cost of borrowing is below what you can plausibly earn by investing, borrowing is not an albatross – it’s a lever – and can be quite powerful.
🐝 That’s the buzz for today – now go forth and make good financial decisions!
Disclaimer: The Budget Bee provides educational content only and does not provide individualized financial, investment, tax, or legal advice. Please consult a qualified professional for advice specific to your situation.