Analysis: Time to borrow? Debt is not a dirty word

Four thousand U.S. dollars are counted out by a banker counting currency at a bank in Westminster, Colorado November 3, 2009.

NEW YORK (Reuters) - Here's a crazy idea: Maybe, just maybe, you should be borrowing more money.

You don't have to tell Matt Kouri of Austin, Texas. Just last month, the chief executive officer of local nonprofit Greenlights traded up to a bigger home for his growing family. Not only did they secure an additional 700 square feet of living space, the Kouris moved into a superior school district that enabled them to switch their son from private to public school. And what made it all happen? A new 4.375 percent mortgage.

Kouri admits to being a frugal guy, but at such rock-bottom rates, he's perfectly comfortable with the manageable debt load.

"To get such a low rate, it was a fantastic deal," says the 38-year-old. "Our previous mortgage was 6 percent, so when combined with depressed real-estate prices, it made for a great buying opportunity." Since Kouri took out his loan, rates have fallen even further, with 30-year mortgages now averaging 4.09 percent, according to Bankrate.com (www.bankrate.com).

Taking on new debt doesn't mean overextending yourself, like buying a second home in the hills of Aspen or a shiny new Maserati that you can't possibly afford. Consumers learned that lesson the hard way before: The housing bust exposed the American consumer, and the financial meltdown exposed the big banks. The bills came due, and we're still paying the price today.

But all debt isn't de facto a terrible thing. If it's within your means to get your dream home for a 30-year fixed mortgage at record-low interest rates like 4 percent, you should go ahead and do it. If you're a company like Microsoft, and you can issue a three-year bond for a ridiculous 0.875 percent coupon, then you should be borrowing as much cash as you cart away in a wheelbarrow.

After the Great Recession, consumers have been conditioned to think of debt as a cancer to be eliminated at all costs. But when money is the cheapest it's ever been, it is also a rare historical moment to be taken advantage of. Used wisely and judiciously, a measure of good debt can cement your family's financial security.

"It's a concept that the wealthy learned a long time ago: Using other people's money," says Greg McBride, senior analyst at Bankrate . "If you're taking out a mortgage at today's rates, after inflation and tax deductions, you're basically borrowing for free -- and that's a very attractive proposition."

That's not to say you should be loading yourself up with debt beyond a reasonable level. The American public has already gotten that belt-tightening message, and learned it well during the financial crisis. Total consumer debt is now down 8.6 percent from late 2008 and fell another $50 billion in this year's second quarter, according to data from the New York Federal Reserve. And in terms of the debt-to-disposable income ratio, the United States is now at the lowest levels seen since 2004.

The same goes for corporations. Since the financial crisis, many companies have cleaned up their balance sheets and stockpiled cash reserves. But yields are so impossibly low, that even traditionally zero-debt companies like Google are only too happy to issue bonds. In fact, the search-engine giant has around $39 billion in cash on hand, but if it can issue a billion dollars in three-year notes with a 1.25 percent coupon, then it's almost silly not to do so.

The argument can even be extended to governmental borrowing. Yes, the federal debt load is a $14.5 trillion beast, a level that can't be sustained over the long term. But if the government can issue 10-year Treasuries for a minuscule 1.86 percent, and earmark that cash for critical projects that could stave off a worsening economy, then is it the worst thing in the world to do so?

Indeed, Robert Reich -- who was Labor secretary under President Bill Clinton -- has been banging the drum for exactly that. As he writes in a recent blog post, "Anyone with half a brain will see this is the ideal time to borrow money from the rest of the world to put Americans to work rebuilding the nation's infrastructure."

Federal issues aside, what really matters to you is your personal balance sheet. And as always, it comes down to the numbers. The point is to get past a knee-jerk negative reaction to debt, and be willing to borrow when it makes perfect sense.

"We're big spreadsheet people," says Kouri, the new homeowner. "You don't go into a big decision like this without being very analytical. And at these rates, we're definitely coming out on top."

(Editing by Lauren Young)