When managed correctly, debt can be a useful tool, especially in a low interest rate environment.
Borrowing in a tax-efficient way has a place in just about any properly executed investment plan. The key is to consider each facet of debt strategically. Choose the option most suited for your particular needs and be sure it fits within the context of your overall financial plan for both short- and long-term time horizons. As you make your decisions, think about:
- How much debt you’re willing to take on
- Whether you prefer to sell assets or borrow
- The anticipated rate of return on your investments
- The anticipated cost of borrowing
- If it makes sense to borrow in the name of a trust or business
- What loan structure makes the most sense: traditional, adjustable-rate or collateral-based loan, among others
- Whether you prefer to use securities, your home or some other asset as collateral
- Tapping into the equity in your house, especially if rates are attractive
- The tax ramifications of a loan compared to selling investments
- How quickly you need the money
- How long you’ll need the loan, particularly a mortgage
- How you’ll pay off a loan and when
Then, be sure to talk to your financial advisor about how to appropriately manage and pay off your loan.