I’ve been contemplating this question recently as I have the means to make mine go away forever. (hopefully!) It is surprising how tough this question is to execute. As Americans, we are totally in love with any tax deduction we can find, and mortgage expense is usually one of the biggest. But why have a mortgage at all? When should it go away?
Classic economic theory uses a utility function to model the non-linearity of the joy we experience in life. Not all dollars bring us the same amount of pleasure. The first million changes your life a lot more than the second will…..etc. etc.
In order to maximize life-time enjoyment, it might make sense to even-out our consumption pattern. i.e. spending a little extra money on comfort when we are young will bring us more joy than spending that same amount of money years later. In essence, we are borrowing future dollars to spend now when we will get the most utility from that money. That is what a mortgage does – lets us have joy today – but it does come with a cost. We are going to have less dollars in the future – (please look-up how much interest you pay over the life of a 30 year mortgage) – but we will have maximized our utility! Life mantra: Maximize Joy – Not Dollars!! This decision was easy – getting a Mortgage makes sense!
But when do you make it go away? When the home is paid off, or later? At a base level, a mortgage is leverage. It is borrowed money which will create extra volatility on your personnel balance sheet. Historically, a mortgage has been a good decision, as the value of the asset (house) has kept up with inflation and the increase in value has often exceeded the interest rate being charged. A big winner for almost anyone in my parents generation.
But what does one do in 2017? I have decided to get back to basics: figure out why I had the mortgage to begin with, see if I have accomplished my goals, be sure I have adequate liquidity………and if they all check out……..see you later monthly payment!!! Time to do the Dave Ramsey debt-free scream!!