Use Debt Wisely
Your family's total debt-to-income ratio should remain under 20 percent, with 10 percent being optimal. While most people think that all debt is bad, in fact, "there is good debt and bad debt," says Bob Waters, chief economist for Quickenloans.com. Good debt is debt that gets your family something, like a home or a car. Bad debt is debt that continues to grow unchecked without providing you with anything of substance (an example is credit card debt). New families should use good debt to move ahead and avoid bad debt whenever possible.
Some new families find that their homes need an addition to make room for the baby. "A home equity loan (HELOC) is the best way to finance a home improvement project. With a HELOC, individuals have the flexibility to draw money as they need it, and the interest is only applied to the amount drawn, not the entire credit line," says Walters. The interest is tax deductible as well, helping to make it a good debt.
There are hidden dangers though. "A home equity loan may be tempting to tap into for unexpected expenses for the new bundle of joy, but be careful. If for some reason you miss some payments, you risk losing your home," warns Sandra Salter, co-owner of American Express Financial Advisors Branch Office, in Newark, New Jersey.