Research

Mortgage Debt: The Good News

The usual advice given to the public by financial planners and the popular press is that less debt is better and in particular owning your own house outright is a desirable goal. We show that this advice is often wrong because mortgage debt acts as an inflation hedge. Mortgage debt also has a valuable refinancing option in case interest rates fall and an abandonment option if the value of the property declines. Mortgage debt is often seen simply as necessary because of people's limited financial assets. Specifically, people can purchase a home only if they resort to borrowing. Employing a numerical model, we demonstrate that some level of mortgage debt is valuable to many individuals who do not face such a constraint. The model is able to simulate over a wide range of plausible assumptions the impact of mortgage debt on a household's wealth. Home ownership provides households a hedge against rental increases, but exposes them to the vagaries of the local real estate market. Our model shows that mortgage debt allows individuals to hedge against inflation and local market risk. The model allows an analyst to vary assummptions to examine the impact of the mortgage decision on a particular household.

Publication Information
Article Title: Mortgage Debt: The Good News
Journal: Social Science Research Network (Sep, 2004)
Author(s): Dudney, Donna;  Peterson, Manferd O;  Zorn, Thomas S
Researcher Information
    
Dudney, Donna
Dudney, Donna
Associate Dean of Undergraduate Curriculum and Programs
Expertise:
  • Financial Institutions
  • Financial Markets & Investing
  • Managerial Economics
Finance
CoB 301 G
P.O. Box 880490
University of Nebraska-Lincoln
Lincoln, NE 68588-0490, USA
Phone: (402) 472-5695
Fax: (402) 472-5180
ddudney@unl.edu
Peterson, Manferd O
Peterson, Manferd O
Emeritus
Expertise:
  • Corporate Finance
  • Financial Institutions
  • Banking and Credit Unions
Finance
CoB 423
P.O. Box 880490
University of Nebraska-Lincoln
Lincoln, NE 68588-0490, USA
Phone: (402) 472-2330
Fax:
mpeterson1@unl.edu
Zorn, Thomas S
Zorn, Thomas S
Emeritus
Expertise:
  • Corporate Finance
  • Financial Markets & Investing
  • Real Estate
  • Managerial Economics
  • Interest Rates & Risk Management
Finance
CoB 423
P.O. Box 880490
University of Nebraska-Lincoln
Lincoln, NE 68588-0490, USA
Phone: (402) 472-2330
Fax:
tzorn1@unl.edu