If you have a mortgage, and also the money to pay it off, should you? There are several answers. First of all, being out of debt is a wonderful feeling. The knowledge that your home
The mortgage, or loan to buy a home, with the home used as security, dates back to the mid 1800’s in Philadelphia. Then, and even until FDR’s time, with the exception of the time period of The War Between the States, the dollar was a wonderful, gold backed, non-inflationary currency. It was safe to save in dollars, as well as to borrow dollars at a reasonable interest rate, to buy a home. Neighborhoods were safe and stable, there was no welfare, violence, neighborhood trashing, or white flight. One could safely borrow long term, at reasonable interest rate, to buy a home. A home, one could be assured, would remain valuable over the years. It isn’t that way now.
With the signing of the civil rights bill 40 years ago, once stable neighborhoods were doomed, and people who had bought and borrowed against homes, were going to be in trouble. West Philly comes to mind, because I lived there, and at one time, owned 17 properties in Philadelphia. Ten of them were for my ice cream parlor chain, and the rest were for duplexes, triplexes, and two single family homes, one of which I lived in, and the other a rental. I bought my first duplex in 1962, and sold the last in 1971, when I moved to Colorado. Not realizing what was going to happen, I fortunately lucked out. My first ice cream parlor was highly successful in a white neighborhood. They were all in white neighborhoods. When I sold the entire chain in 1971, it was profitable and even lucrative, but the buyer neglected them, ruined them, and then sold off each building separately I suppose. In one trip to Philly, my once beautiful #1 store was wrecked and abandoned. My last trip it was an empty lot. There are lots of empty lots in neighborhoods of West Philly now. Abandoned wrecked houses which were once wonderful, have been cleared by the city, and empty land is now there.
Suppose you had bought a wonderful home in West Philly, say in 1965, and had taken out a 30 year mortgage with which to buy? Within ten years, with 20 years still left to pay, the neighborhood would have changed. Blacks, who probably had ’bought’ with no down payment, had moved in to your neighborhood, and the decline had begun. Noise, trash, abandoned cars, no maintenance, and white flight, would have made your former dream home a nightmare, and you would be unable to sell it for what you owed on it A 30 year preview of 2007. West Philly has become a literal ’no man’s land,’ and believe it or not, the once wonderful, trashed homes which are close to the University, have been bought by whites, and restored, which is a similar situation to Harlem, in New York. But those who bought, lost, and moved, probably had their credit ruined.
We all predicted exactly what has happened to real estate, and least I did, and it has happened. Millions foolishly bought homes at inflated prices, lied about incomes, were defrauded by mortgage companies, appraisers, and sales people. What went up, had to come down, and it has come down with a crash. The crash isn’t over by a long shot, and when heavy investor of sub prime mortgages Bear Stearns went, it threatened to take the world’s economy with it. American sub-prime mortgages have been bought as investments by banks around the world. Just last week, another Swiss bank wrote off $19 billion in US sub prime mortgages, and there are hundreds of millions more in foreclosure. The worse the situation gets, the more that will be laid off, and subsequently, more and more foreclosures. Now people are parading around the Bear Stearns office, with placards demanding help with their mortgages and problems. They say that if Bear Stearns can get bailed out with $29 billion, they want to get bailed out also, and you can’t blame them.
The situation in 2008, is slightly different than 30 or 40 years ago, but there are some striking similarities. First of all, foreclosures are not limited to black or debased neighborhoods. Foreclosures are everywhere, and probably not in those bad neighborhoods. Second, the foreclosures are not from welfare recipients and trash people usually, but working classes, who got hoodwinked, and are now suffering. Today’s foreclosures have nothing to do with white flight. If they walk away, today, or 30 years ago, their credit is not only ruined, but when the property finally gets sold, they may have a judgment placed upon them, which may prohibit them from ever buying anything till that judgment is paid in full. If they stay, like 30 years ago, their home is worth far less than they owe on it, and it may even be still going down in value. What to do? I have no answer, as this started out as a column on whether to pay off a mortgage or keep it, and it got to this. When I start to write a column, I often don’t know where it will go!
is paid for, is a fine feeling. On the other hand, if you have a fixed rate, long term mortgage, the payments will remain the same throughout the term, and even though gasoline may go to $15 a gallon, and a dozen eggs, $7.50, your monthly payments will remain the same, with the exception of taxes and insurance, which will have to be paid, free and clear or not. The idea of paying mortgage payments with ever decreasing value scrip is great…if your income is assured. But, suppose you get laid off? Suppose your job, if you have one, could be abolished due to a depression, which could mean massive layoffs? You then might not have the scrip to make the payments. If you keep the mortgage, the interest payments are deductible from your income taxes. Suppose you pay it off, and the neighborhood goes to pot? In Las Vegas, there are tens of thousands of foreclosures, and thousands of houses are not maintained, grass watered and cut, and the foliage is dead. Many are being vandalized and even burned, thereby ruining once good neighborhoods. Most mortgages are not transferable, so that is out if you sell. What to do? Ask yourself a couple of questions. Is my income source reliable and dependable? Is my neighborhood stable, with no foreclosures and empty houses waiting to be vandalized?
If you decide to keep the mortgage and have the cash to pay it off, for goodness sake get out of dollars, and protect yourself! If you keep the mortgage, buy gold and silver with your cash, and watch how, while payments remain the same, the gold and silver will constantly go up, and make each payment less and less painful. Sell a couple of ounces a month to make the payment. As the years pass, it will take only one ounce a month, then half ounce, then a quarter ounce, etc. You may eventually pay the whole thing off with a couple of ounces of gold, and you might be further ahead keeping the mortgage, rather than paying it off. You decide.
I wonder what will become of the millions of foreclosures? The ball has been passed around many times. Does a Japanese or Swiss bank own the foreclosed house? A recent court case denied it because the last buyer of the mortgage paper couldn’t produce the original paperwork. What happens to foreclosed houses, if the note has been passed around like cards in a poker game? Can the defaulted ’owner’ stay till thrown out? Who will press for them being thrown out if the note has been passed on to a bank 15,000 miles away? I haven’t the slightest idea!