I am 6 years into a 30 year mortgage. I only put 10% down, and now still owe $160,000. According to economic experts such as Mr. Decker, I should pay down my debt before the recession hits. However, lets look at this advice.

Say I have $50,000 saved. If I apply this to the principal of the loan, I will still owe $110,000. While this will reduce my monthly payment from roughly $1000 a month to $700 a month, there are two serious drawbacks:

1. I would now have no buffer of cash to make mortgage payments with; and

2. If I cannot make the payments, and I default on the loan, the bank gets my equity PLUS the $50,000 I used to pay down the loan.

Am I missing something here?

-- Principal Peon (banksters@re.buttheads), January 20, 2000

Answers

hard call isn't it? 50k pay down over the life of your loan could save you 72k in interest. This is only one consideration. Debt has become an American way of life. And no one has all the answers.

Tommy

-- Tommy Rogers (Been there@Just a Thought.com), January 20, 2000.

Keep in mind, whatever you do- during the last decade of Japan's depresson/recession, real estate values dropped in half. IF that happens here your house will be worth half the present value. VERY possible. ( Banks don't just foreclose in a hurry though, if you can't make payments. It can take years.) My advice? sell now, quick. Get something smaller and cheaper this spring, with lower debt. The whole crowd of lemmings in the USA is in a big house on the shaky foundation of illusive prosperity undermined by trillions of national debt. Get into something small built on a rock, before foreign investors yank out their money-IT CAN HAPPEN. IT CAN HAPPEN SOON.

-- thinking (smart@loans.com), January 20, 2000.

No, your instinct is correct. Decker is a shill and would sell hiw own mother (or at least the test tube) to keep his masters happy.

-- Andy (2000EOD@prodigy.net), January 20, 2000.

IMHO, in your case, Principal, I think it would be a bad idea to pay down just a portion of that large principal for the reasons you gave. It would seem to be a better path if you could afford to pre-pay a certain amount each month toward the principal to pay the loan off quicker. For instance, say your loan was for 7%, if you started paying an extra $100 per month, by the time you had the loan paid off, you will have saved over $35,000 in interest, and made 51 fewer payments.

-- (no@payoff.com), January 20, 2000.

Peon,

If you can afford it, add a few hundred dollars to each payment. You'd be surprised how much time this will cut off your mortgage. Don't give up that 50K. You never know when you might need it. Loss of job, injury, etc. Always nice to have a buffer.

-- (I'm@pol.ly), January 20, 2000.

Principal Peon, You are mistaken on a couple of points. First of all, paying $50,000 towards your principal does not reduce your monthly payment unless you refinance. If you just send extra principal to the mortgage company, it will shorten the duration of the loan, but you will still owe the same monthly amount. Since you put 10% down, you are probably paying mortgage insurance. When you get to 20% equity, you may be able to cancel the mortgage insurance. It is probably a good idea to at least pay down 20% (if your not there already) since mortgage insurance is not deductible.

If you default, the mortgage company will sell your house and you get the difference between the sales price minus expenses and what you owe. They do not keep the whole enchilada.

To decide whether to pay down or not, you need to look at your interest rate and what you could earn on that money. There is no single answer. It all depends on risk tolerance and what actually happens to the economy. If inflation really heats up, it would be a good idea to have a long term fixed rate mortgage. If a severe recession hits that lowers you income, you may wish you had paid down the loan and refinanced to a lower payment.

-- nobody (nobody@nowhere.com), January 20, 2000.

Peon, If inflation increases (hyperinflation in the extreme case), it's good to have a loan, because you are paying it back with inflated dollars. As long as you have a source for those dollars which is increasing with inflation (like an inflation-increased wage or gold, for instance.)

But that means you have to make the guess whether there is going to be inflation or deflation.

-- Chuck (cestin@aa.net), January 20, 2000.

Don't sweat it. I've worked in a bank, and take it from me: the only people who are actually have their house sold from under them are those who refuse to pay, or those who have no long term prospects of paying. In a falling market, banks are even more loathe to evict, because they don't get their money back.

At worst, you'll default on payments for a couple of years and end up even deeper in the wage slave cycle. And if that bothers you, you shouldn't be in a 30 year mortage anyway; I've got a TEN year mortgage on a small house.

I'll stick my neck out and assume that you are a white male with a good job living in a nice neighbourhood. You'll be way, way down your bank's repossession list. Bad stuff only happens to poor people.

-- Servant (public_service@yahoo.com), January 20, 2000.

Prinicpal Peon, there is some good advice here. If your job looks like it could be a recession fall out candidate, keep most of the extra cash. Even a little as $100 a month toward the principal helps it move down quickly.

This could be a 6-18 month recession unless oil really tanks, the geopolitical problems escalate, global warming does its thing, cyber terrorism reigns, etc. The .com bubble could well come back down to earth. I don't totally buy into the new paradigm thoughts about stocks who are trading at 100 times their lack of earnings.

If you follow any of the financial theories, there is one out there by Harry Dent who bases his prognostications on demographics and birthrate waves. He says that a generation reaches its peak purchasing power at around 47. For the large group of boomers, that is in 2008. After that there will be a significant correction.

So given all that fun stuff to think about, don't put yourself in a financial corner you cannot get out of. Manage your finances, manage your life, take care of your family.

Good Luck

-- Nancy (wellsnl@hotmail.com), January 20, 2000.

Peon

Buy 5 - 10 grand worth of gold to preserve some of your wealth. Keep the other 40 -45 grand around to pay off bills or your mortgage. If the dollor tanks, you are paying your mortgage with the now worthless $45K. This way you have a way to pay bills (for a while) with a cash reserve while you see if your going to keep your job. The gold will increase in value vs the dollar in this situation. Be aware you will lose the money you could have made in an investment. I consider dumping your cash in to mortgage payments an investment. The return is the reduction of interest if you refinance. If you buy stocks with the money, you are essentially betting that things will continue as well as they have been.

Buy some gold, keep your cash for a rainy day, invest any further earnings in paying off bills and when they're all paid off invest normally as you see fit.

Keep in mind, I am NOT rich. But I am fairly secure finacially. The formula of keeping back some wealth just in case and only then investing normally let's me sleep well at nights.

Just my unproffesional advice.

Servant

When I was poor I got treated the same way as I am now that I'm not. What changes? I believe in bad luck, but I also believe in helping yourself out of a bind. I went from "have nothing, including an education" to "working hard" to "have lots". I don't buy the "poor are kept in their place" theory. Unless you count being conditioned to accept welfare instead of going for the gusto. Welfare is a drug that will incapacitate as readily as any narcotic.

Watch six and keep your...

-- eyes_open (best@wishes.2all), January 20, 2000.

If you are concerned about reducing risk then sell that house and rent for a year. Take the profits (tax free I might add since you had lived there over two years) and HOLD with your $50K (should give you at least another $50K = $100K). Once the R/E market dumps and R/E auctions are plentiful, then go choose a nice house and pay 1/3rd the current market price IN CASH (if you still have a job and can afford the taxes). Then start to build your savings like there is no tomorrow. Once the economy starts up again try to position your savings to take advantage of the growth potential of the specific sectors which restart first and then rotate into other sectors as they follow suit.

Let's face it if you keep the mortgage for 30 years you will have paid a total of about $400K for that house, all the interest up front (about $240K in more expensive dollars). With the plan above you will free yourself from the debt slavery you have become so accustomed to living in today. And you have the potential risk of R/E price dflation AND unemployment casuing you to default on the property.

BTW look at your mortgage. If you have a 'Power to Sell' clause rather than a 'Foreclosure of Property' clause, then if you can't pay the mortgage they can FORCE you to sell and FORCE you to pay the difference (loss) out of your future pay or assets. Today it is the borrower who is exposed, not the bank, to losses incured sue to a downturn in R/E valuations and inability to pay.

They learned something during the 1980's I suppose.

-- ..- (dit@dot.dash), January 20, 2000.

A tough question. Certainly there is nothing in the economy to encourage people to pay off loans. One thing to consider is what you are doing with your $50,000. If it is in the stock market, and that tanks, you've gained nothing by your strategy.

-- Amy Leone (leoneamy@aol.com), January 20, 2000.

Our situation is that we are both retired. We have a house to which we've made many changes, so we're kind of attached to it, because we designed the changes.

A few years ago, our son and daughter needed financial help and we wanted to get a lower rate, so we refinanced. We got a 15 year, 7% interest loan. Our daughter has paid us back, but our son has been unable to make payments for a couple of years. ($25,000 of a $60,000 loan is what he still owes... actually, that was a second mortgage at 9.5%.) So we thought that if we took money out of our savings, which was in IRAs, (we have to pay taxes on what we cashed in) and paod off that loan, so as to reduce our debt Re Y2k, that we'd be better off in case our money disappeeared if the whole system crashed. We also switched to T-bills with the remainder (small by most standards.) Now, apparently, we have to pay taxes on some of that, if not all.

My question: Are we better off having paid off the $25,000 loan at 9.5% by cashing in our IRAs and putting the remainder in T-Bills, and having to pay taxes on some, if not all, of this...AND would we now be better off to sell and rent or keep our house (in a nice neighborhood) for the next time R/E is good, down the road?

Yes, we have a financial advisor, but he's a personal friend who thought we were stupid for being concerned about Y2K.

We are in a state of suspended animation, wondering if we should have listened to him, and left everything where it was. (It was getting 6.9% or so where it was - - very conservative, I know.)

Our mortgage is $670 per month, and we pay the insurance and taxes on top of that, and before we paid off the rest of our son's loan, we paid another $270. Our income is about $1600 per month - - only Social Security - - so we have to dip into our savings periodically to live. If something happens to either of us the monthly income would go to $1100. If we sold and bought a small house for cash, would that be a good idea?

Thank you very much for any help you can give!

We had almost talked ourselves into moving last year, because of the prices being higher and our house is twice as big as we need.

Then, with Y2k we decided to wait (we really didn't want to sell anyway) because we thought our house was the only one big enough to house our children and grandchildren if Y2k were bad. (Four bedrooms and four baths.) In our indecision - - which included selling and renting for a year, our one son said we'd have to pay what we're paying on the mortgage for rent anyway, so that made us feel that keeping the house was the best decision.

-- Connie Iversen (hive@gte.net), January 20, 2000.

Mortgage Banking 101

If you apply one extra payment a year to principal you will knock at least 10 years off your mortgage.

Could be in the form of 1/12 of your monthly payment added to your monthly payment.

It will most definitely SAVE YOU THOUSANDS OF DOLLARS in the long run. I wouldn't suggest dropping the whole 50,000 in your house at one time.

Do yourself a favor and take it from someone who's been in the business for 20 years.

You'll be thankful you did.

Deano

-- Deano (deano@luvthebeach.com), January 20, 2000.

Connie,

Unfortunately housing costs big money and we get very emotionally invested in it so its hard to treat it like an asset allocation when it really is one (usually the biggest one a couple has).

One of the questions you have to ask yourself is this "What is the worst case scenario for us?". You have a fixd obligation (15 yr mortgage) which is eating you alive with up front interest costs. Look at any repayment graph and you will see that you pay the interest first and then the principle as the loan matures.

Look at it this way. We are in a high R/E market right now. That is usually when you sell Real Estate, when the market is flush with credit and prices are going up or have topped out. At this time in your lives you should be totally debt free so that every dollar you have is available for savings or basic expenses. With a new mortgage you are sending alot of precious dollars off to the bank and getting nothing in return.

Let's say that you sold you home and paid off the mortgage (but still insisted that your son pay you back BTW). You would have a wad of cash. You would be protected from possible reduction in R/E prices. You would be positioned to buy back in at an auction when things get really tight (ie - bancrupcies rise). You would also not be paying the bank for the right to live in your home. The $1600 of income would not be spent on paying interst to the bank. You could earn some interest on carefully selected Inflation Indexed US Gov Bonds.

What might you lose. You might lose the chance to make a few more bucks on the R/E market expansion. You will have to pay some rent, but you may be able to arrange something with another couple who has a large house that they could rent you a portion of for under market rates (win-win situation). Housing prices could go up in the event of a hyperinflation like the 1970's. You would lose you home and may not get what you want down the road.

Alot of financial advisors are PR/sales men for the status quo. You may need to shop around for someone to help you who can set aside their profit motive long enough to help you sort this all out. There are ways to protect yourself from moves which are contrary to your position, whatever position you take. That needs to be explored.

Right now my wife and I are trying to sell our house, pay off the mortgage and build a basic place without debt and still have something left to restart our savings. We have recognized that long term debt is a blood sucking parasitical institution. That's not a popular view these days, but that is what seems to us to be the case.

Eliminate debt Save and pay at time of purchase Swap and trade rather than earn and buy Buy used most of the time, new when you want to splurge Reduce expenditures (Co-ops, bulk buys) Buy the capacity to produce, not the end product Make what you need and some extra to swap or sell Value time above money Be content with simple things and each other Enjoy some of the fruit of your own labors every day

-- ..- (dit@dot.dash), January 20, 2000.