17

75% of Americans are in debt. I'd like to know if I'm also considered in debt if I am paying my mortgage on a house.

I didn't think I was in debt if I own the house. I guess I pay 'rent' to a bank who sold the mortgage to me. If I stop paying, I lose the house I never 'owned'.

So what is the reality? Are people considered in debt if their only 'debt' is the mortgage/loan for their house, or are these people excluded from the statistic?

  • 43
    Mortgage is debt, why would you think otherwise. – DumbCoder Apr 24 '15 at 14:28
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    You're in debt if you owe money to somebody else. That you might own assets that could be sold for more than the debt doesn't alter that fact. It might mean you have a positive net worth, but that's a different matter. – Nigel Harper Apr 24 '15 at 14:32
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    You own the house, but if you were to sell it and have the cash you'd still owe the bank their money. You don't own it "outright", like you own the things you buy without taking out a loan for. – David Rice Apr 24 '15 at 14:58
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    @BrianDHall: Not at all. It's simply that "in debt" (a binary condition) and "net worth" (a numeric value) are two completely distinct things. – Mason Wheeler Apr 24 '15 at 16:59
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    @BrianDHall, well that's what Lehman Brothers thought ... . Debt represents a risk. It may be a sensible risk, but it's still a risk. – Charles E. Grant Apr 24 '15 at 18:48
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The statistic you cited comes from the Federal Reserve Board's Survey of Consumer Finances, a survey that they do every three years, most recently in 2013. This was reported in the September 2014 issue of the Federal Reserve Bulletin. They list the percentage of Americans with any type of debt as 74.5 in 2013, down slightly from 74.9 in 2010.

The Bulletin also has a table with a breakdown of the types of debt that people have, and primary residence mortgages are at the top of the list. So the answer is yes, the 75% statistic includes Americans with home mortgages.*

The bigger question is, are you really "in debt" if you have a home mortgage? The answer to that is also yes. When you take out a mortgage, you really do own the house. You decide who lives there, you decide what changes you are going to make to it, and you are responsible for the upkeep. But the mortgage debt you have is secured by the house. This means that if you refuse to pay, the bank is allowed to take possession of the house. They don't even get the "whole" house, though; they will sell it to recoup their losses, and give you back whatever equity you had in the house after the loan is satisfied.

Is it good debt? Many people think that if you are borrowing money to purchase an appreciating asset, the debt is acceptable. With this definition, a car loan is bad, credit card debt is very bad, and a home mortgage might be okay. Even Dave Ramsey, radio host and champion of the debt-free lifestyle, is not opposed to home mortgages. Home mortgages allow people to purchase a home that they would otherwise be unable to afford.


* Interestingly, according to the bulletin appendix, credit card balances were only included as debt for the survey purposes if there was a balance after the most recent bill was paid, not including purchases made after the bill. So people that do not carry a balance on their credit card were not considered "in debt" in this statistic.

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    @Grasper Generally property tax is not considered debt unless you are late paying it. The property tax is required for everyone every year, and you are essentially paying for required services each year. It is similar to a mortgage, however, in the sense that, if you don't pay it, you will lose your house. – Ben Miller - Reinstate Monica Apr 24 '15 at 14:52
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    If home mortgages weren't allowed, there would be very few people who could afford to own a home. You've got the cause and effect backwards there. Back before home mortgages were invented, and again before government agencies were created to create a secondary market for them, plenty of people could afford to own a home. Doing away with these things wouldn't do away with home ownership; it would do away with the way they changed it--housing prices going so high that the average person can't afford to own a home without placing themselves in bondage to a bank for 2/3 of their productive life. – Mason Wheeler Apr 24 '15 at 17:01
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    To say that a house is 'an appreciating asset' is arguable at best, if not downright wrong. – Calculus Knight Apr 24 '15 at 17:51
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    @BenMiller Houses depreciate and require upkeep likewise. Even without taking into account possible reforms to get with the style of the decade, I think it's misleading to put a car and a house in different categories. The fact that people like to own their home doesn't make mortgage debt any better than 'car debt'. – Calculus Knight Apr 24 '15 at 18:09
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    I might get burned at the stake for even daring to suggest this on a site where money and personal finance are the central focus, listed right there in the name even... but there are plenty of good reasons to own a home, even though it is unequivocally a bad monetary investment (outside of bubble conditions), because there are plenty of things that are more important than money. – Mason Wheeler Apr 24 '15 at 20:55
22

I think you're thinking that "in debt" doesn't just mean "owes a debt" but somehow means "owes more debt in total than the assets". That condition, owing money without offsetting assets, is "having a negative net worth". If you have a mortgage then you have a debt and you are in debt. You may have a positive net worth, if you have equity in the house and your car and such like, and have cash in the bank. You may have a negative net worth if you owe more than you own. But either way you are technically in debt.

Knowing that, it's not surprising that 75% of Americans are in debt. It's surprising that 25% are not. They have no credit card, no car loan, no mortgage, no line of credit, no student loans. Is it because they've paid all that off? Or because they are deadly poor and own nothing and can't be lent anything? You can't just say it's bad to have debt. It's bad to have too much debt, to have a negative net worth, to be in the habit of borrowing to finance a lifestyle you can't actually afford, and so on. But it's perfectly normal to have a debt or two. That's how our system mostly works.

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    +1 for the difference between "having debt" and "having negative net worth". However, I think in common usage people do say "in debt" when they mean "in net debt". – BrenBarn Apr 24 '15 at 17:39
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    Why is it so hard to believe that 25% have no debt? I've never had a car loan, paid off student loans years ago, never carried a balance on credit cards (well, except for those 0% interest for xx months deals), and will have the mortgage paid off in about 7 years, which with luck will give me a good chance at 30+ years of debt-free life. – jamesqf Apr 24 '15 at 18:45
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    So even if everyone was like you, @jamesqf, they would spend 50% of their life in debt and 50% not, right? But I don't think even half of the US is like you. So there are a LOT of people who were either born into money and never borrow, or who are so poor they will never get a loan. And while I intellectually know that, being reminded that it's quite such a piece of the population is a bit of a surprise. – Kate Gregory Apr 24 '15 at 18:47
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    I'm not arguing that. But it's not "25% of people eventually have no debt" it's "at any given time 25% of people have no debt". – Kate Gregory Apr 25 '15 at 6:25
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    @Kate Gregory: Yes, because "at any given time" means you look at the whole population, which includes the 25% or so who had debt at some prior time, but have now paid it off. Whereas if you look at one individual from say 18 on, you have an initial period of debt - car loans, college, then mortgage - which eventually get paid off. – jamesqf Apr 25 '15 at 18:16
11

Yes.

A mortgage is a kind of debt. Someone lends you money to buy your house, and you owe them the money, so you have debt.

  • What are you basing your claim of? – Grasper Apr 24 '15 at 14:32
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    The definition of debt. "A debt generally refers to money owed by one party, the debtor, to a second party, the creditor." Just because you own the home doesn't mean you don't also owe the mortgage. It just means you have both an asset and a debt. – David Rice Apr 24 '15 at 15:00
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    David is right. However, once nuance of your question is you asked if you were "considered in debt". Considered assumes some actor. I suppose what someone considers is specific to the person doing the considering, but in common usage, you are in debt because you have incurred debt. – JohnFx Apr 26 '15 at 0:13
9

Yes, a mortgage is debt.

It's unique in that you have a house which should be worth far more than the mortgage. After the mortgage crisis, many found their homes under water i.e. worth less than the mortgage.

The word debt is a simple noun for money owed, it carries no judgement or negative connotation except when it's used to buy short lived items with money one doesn't have.

Aside from my mortgage, I get a monthly credit card bill which I pay in full. That's debt too, only it carried no interest and rewards me with 2% cash back. Many people would avoid this as it's still debt.

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    well, in this case the statistics are kind of misleading. If they say 75% are in dept doesn't mean that they have no choice than pay their loan. It doesn't fully reflect the poverty status or anything because even rich people have mortgages... – Grasper Apr 24 '15 at 14:40
  • here I would have one more question. If I own the house and pay off dept, am I still in dept because I still have to pay property taxes? – Grasper Apr 24 '15 at 14:48
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    Why is it misleading? debt implies nothing more than owing money. If 75% are in debt, only 25% use cash for everything. So what? If you wish to the count the angels on a pinhead, yes, when the tax bill is cut, you have an outstanding debt. If you'd like to clarify the purpose of the question, it might help. There are many things I'm billed for that don't hit my credit report, unless they unpaid for a long time. – JTP - Apologise to Monica Apr 24 '15 at 21:44
  • @JoeTaxpayer: I don't think a credit card charge that's paid in full before it accrues interest should really count as a debt. It'd be like saying that if I go to a store, I'm in debt between putting stuff in the shopping cart, and handing the cashier money. – jamesqf Apr 25 '15 at 6:27
  • @jamesqf - I agree with you, but I've been told otherwise by followers of The David. In response to my stating that I charge everything to a 2% cash reward card, they've made it clear that I'm not only in debt throughout the month, but that it's a proven fact that I spend 10% more than if I used cash. I don't believe that, either, by the way. – JTP - Apologise to Monica Apr 25 '15 at 16:27
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If you owe money to someone else then you are in debt, at least in the common meaning of the word. What you happen to own, or what you spent that money on doesn't alter that fact.

Are people considered in debt if their only 'debt' is the mortgage/loan for their house, or are these people excluded from the statistic?

The only way to answer that for sure is to look at who compiled the statistic and exactly what methodology they used.

  • 1
    I think this is not correct, particularly based on the clarification to the top answer. If I owe property taxes, I'm not in debt by the common meaning of the term (unless I am behind on them, and even then it's unclear if that's actually debt). If I eat at a restaurant, I owe the bill, but it's not commonly called a debt. Commonly, debt refers to borrowing money, or perhaps being late paying money owed, but 'on time' is not in debt. – Joe Apr 24 '15 at 15:24
1

Mortgage is a (secured) debt, a combination of a promissory note, and a security interest providing the mortage holder a secured interest in the property. Yes, you are "in debt".

But that depends upon whether you define the term "in debt" as a debt appearing on the balance sheet, or the net of assets - liabilities is less than zero, whether you have a "debt" expense on the income statement (budget), or whether the net of income - expenses is less than zero.

One person might look at their budget, find the (monthly) mortgage payment listed, and judge that they have a debt payment, and thus are "in debt". Or they might look at their expenses, find they exceed their income, and judge that they are "in debt". Another person might look at their balance sheet, compare assets to liabilities, and only say they were "in debt" when their liabilities exceeded their assets.

Some people view mortgage debt as "good debt", as they view certain debts as "good" and others as "bad". Trust me, having a high mortgage payment (higher 30% of your net income) is hard, and over 40% is bad.

Consider you balance sheet and your income statement. On your balance sheet, the house appears on the "asset" side with an (estimated) value, while the "mortgage" (really, the promissory note part of the mortgage) appears on the "liability" side. On your income statement, your house does not appear on the income side, but the mortgage (promissory note) payment appears on the expense side. So, you clearly have both a "liability" with a clearly-defined value and an "expense" with a clearly-defined payment.

But do you have an "asset"?

According to an accountant, you have an "asset" and a "liability". But you do not have a business asset that is producing revenue (income), nor do you have a business asset that can be amortized and expensed to reduce taxable income. When we think about an asset, does the word have the connotation of some thing with value, something that produces income? Well, by that measure, a house only provides income when we rent it out, and only has value when we consider selling it.

As millions of families discovered during the housing (price) collapse, when the market price of your "asset" falls substantially, your personal financial status can fall negative and you can be "broke".

0

The expression "in debt" when talking about a person's financial affairs means that the sum of debit balances on all accounts exceeds the sum of credit balances on all accounts. A mortgage account is not excluded from that.

This definition also does not consider whether any of the debt is secured, or ownership of assets (shares, property, chattels, etc). So, someone with a mortgage of one million dollars for a home that is worth two million is in debt by one million dollars, until they they sell the home (for that amount) and pay down the mortgage.

That means "in debt" is not necessarily a statement about net worth.

  • 1
    Your first sentence seems to contradict your last? – VBCPP Apr 25 '15 at 14:40
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    Nope. The value of a house, for example, would contribute to a statement of net worth, but not to whether you are in debt. – Peter Apr 25 '15 at 19:00
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    The first sentence still looks like it is defining net worth, not debt. – VBCPP Apr 26 '15 at 2:28

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