Most do. It’s secured by what is most people’s most important and most expensive investment, and that is a home. Most mortgages are for long periods of time, and have a secured interest rate, which will not change. Most also, have refinanced their mortgages to a point where they may be lower than 6% interest. 30 year mortgages at 6% or less interest rates, will be what I deal with first. If you are in such a situation, and are tempted to pay it off early, in order to be free of debt, I advise you not to do it. Why? Several reasons.
First of all, there can be no doubt that the dollar is losing value, and losing it fast. All the while, your payments remain the same, and are subsequently easier to make, as your dollar earnings increase, as most do, because of decreasing dollar value. Remember, butter is no longer $1.25, but $4. Gas is no longer $1.25, but $2, and this is just in the last couple of years. Other comparisons can easily be made, but as the dollar declines, your mortgage payments remain the same. Why pay it off early? If it has perhaps 20 years remaining, you may be able to make a monthly payment with the cost of a gallon of gas or a sack of groceries in ten years. Secondly, not only do the payments remain the same, with the exception of taxes and insurance, (they will go up anyway, even if the home is free and clear), but the interest and taxes are deductible from the oppressive income tax.
“But I have extra money,” or, “I just inherited a bunch from my deceased parents, and have enough to pay it off, why not?” Because the payments will remain the same, and you can take the extra dollars and place them into something which will stay the same in value, or maybe even increase, but the cost in dollars will escalate, as the cost of everything goes up. Is a gold coin going to increase in value? Of course not, as it’s the same gold coin! But the price in dollars will undoubtedly go through the roof. Your mortgage payments will remain the same. Maybe you can pay it all off with a couple of Krugerrands or Gold Eagles in a few years, and if you had placed the extra inheritance in gold and or silver, you would have no mortgage, and still have most of the gold and silver. Make sense? I think so.
If you have succumbed to an ARM, because of low interest, or advertising, this may be another thing short term anyway. If your ARM has a life span of three years, you’d better be placing every extra dime you get into silver or gold, so that when the ARM expires, you can sell the gold and silver, and either pay it way down, or possibly pay it off, if gold and silver do what most of us think it will do. When that ARM expires, you are going to be at the mercy of then interest rates, which undoubtedly will be a lot higher than your ARM’s rate. If you get it paid way down, you will be less victimized by the ARM. If it is a five year ARM, the same thing applies, but hold the gold and silver till the end of the term, and then sell and pay the mortgage way down, or off completely. At the end of the ARM, if there is still a balance due, get a long term 30 year mortgage at a fixed rate, and refer to paragraph two.
If you are debt free, this is wonderful, and congratulations. Should one take out a mortgage at current low interest rates, buy gold and silver, and pay it off in constant payments, etc? I say no, but the temptation is there, admittedly. This would be the same as buying a futures contract, only with far less risk. 95% of futures “investors” lose their shirts. You wouldn’t do this with a mortgage being used to buy silver and gold, but it’s a decision you’ll have to make. I am not going to do it, and I certainly could.
As far as futures are concerned, thousands get burned, and some fatally, with futures. Here’s what happens. “Oh gold or silver is going to go much higher, so I’ll buy a contract for several months out, and I’ll leverage myself handsomely, and make a huge profit.” This is what they say, as they pick up the phone and call Lind-Walldock, or the like. All looks great, until as is usual, the prices correct, as did silver and gold recently. Then the phone rings and margin calls are required. It matters not whether the prices will be higher in months ahead. They have plummeted now, and you must pay the margin call, which is just as leveraged as is the contract itself. If you can’t meet it, you are sold out and billed for the leveraged amount. If you make the margin, good for you, but many haven’t been able to, and one guy I know lost his home because of margin calls. Another borrowed $160,000 to meet them, and was lucky to be able to do so. Go to Las Vegas and play the dollar slots or blackjack. It’s a lot more fun, and like futures, is pure gambling. As the prices correct and the futures and stocks do also, my safe is paid for, and I haven’t a worry in the world. But then I am sort of ancient, and long ago lost the urge to gamble. The last time I bought futures was several years ago, when I thought silver would never go below $5.11, which was what my contracts were. It went well below, stayed there, and it cost me a lot of dough. I vowed never to do it again, and I haven’t.
Few have enough dough to pay cash for a house, so most have to take out a mortgage. Do so, but also be forewarned about the potential of a housing bust if you don’t already own one. In today’s economic situation, there are at least two factors affecting housing. First, as the dollar goes down, obviously homes will cost more to build, and the land on which they sit will also go up in dollars. This may make the home increase in dollar value, and be a good investment. Second, most housing is vastly over-priced today, even counting the cost to build in the future, much less currently. Homes selling for $200 per square foot are not uncommon today, and if they are ten years old, may have cost $65 a square foot to build. Today, a decent home can be built for $100 per square foot, including land, in a good neighborhood. Neighborhoods are also something to consider. Is it stable? Likely to change in either commercial or ethnic makeup? This may sound like discrimination, but I am sorry. If a neighborhood experiences ethnic change, a freeway comes through, or becomes commercial, it will always lose value. Housing in west Denver, ritzy communities in Colorado, and other Colorado cities, have gone down in price, and in my town of 13,000, which most consider heaven, prices have leveled off. Is housing soon to go the way of the techies? Think about it. No one knows what will happen tomorrow, but a lot of my clients have sold and are renting, waiting for the housing crash, so they can buy again on the cheap. It may happen, but I’m not selling, since my home is a unique 1887 brick Victorian and irreplaceable. Otherwise I may be tempted!
There are a lot of ins and outs to every situation, and this has to include mortgages, and whether to buy or not at this time. Will real estate go down, and then the dollar decline become tornado like, causing everything to go up so quickly, that the decline is overcome? I don’t know. You decide. Have a great 4th, and do celebrate with a 5th, but don’t drive under the influence! Closed Monday. Protect yourself.