Should the financial crisis inspire us to accelerate our mortgages even more?
In Mortgage Accelerator Blog by Ken Stone (September 28, 2008 2:53 am)
I’ve been thinking about how the current financial crisis might be affecting homeowners in the United States who are focused on a mortgage accelerator program - paying off their mortgage early.
I’m starting to hear about folks in the mortgage and real estate community who are advocating real estate as the last safe investment opportunity. This sounds like a way to sell homes and mortgages …
While I agree that investment real estate can be a wise financial move (for the right person - one who understands the risks, and for whom real estate is an appropriate and suitable investment - one who also has sufficient liquid assets and reserves), I completely disagree that real estate - specifically - home equity, is a safe investment.
Look no further than the current housing crisis for proof of that.
Consider the many pre-retirement and in retirement homeowners who own their homes free and clear. Nearly across the board, they’ve seen the value of their homes decrease. What happened to that home equity? Was the lost home equity safe? (you might read my article Real Estate Declines Could Spell Trouble for Boomers and Their Retirement Plans here)
My advice to folks wanting to get rid of a mortgage and remove the burden of a monthly mortgage payment (provided they’re disciplined financially) is to follow my program for paying off a mortgage early by not applying any of their extra money to the mortgage, but instead, saving it.
This is an especially critical move given today’s economic environment. Can you imagine how devastating it would be to complete the early pay off of your mortgage only to learn that your retirement nest egg was depleted in the most recent Wall Street trouble?
With all the talk of about the Great Depression of late - you might be even more inspired to pay down your mortgage to avoid the fate of so many homeowner’s during that time in our Country’s history: foreclosure. But let’s be clear: mortgages had a clause in the deed of trust at that time that allowed the bank to call the note for any reason, or no reason at all. This does not exist anymore. Homeowners who pay their mortgage on time don’t have to worry about foreclosure.
And what’s the greatest risk to foreclosure? An unexpected financial event that drains your financial reserves. Getting ahead on your mortgage today won’t protect you from foreclosure unless there’s no mortgage when you have your unexpected event. Even a free and clear home won’t get you through the event.
Save your money and sock it away in a safe investment. Don’t pay down your mortgage under the misguided belief that home equity is a safe investment. And surely don’t invest in real estate under the belief that investment real estate is a safe place to invest. Home equity is home equity - it doesn’t matter if it’s in your primary residence or your investment real estate (does that mean I oppose investment real estate? Heck no! But if you’re not already in that game - or very careful about how you get in that game, it’s probably not for you). What’s a safe place to invest your money? Great question for a financial advisor!
To your optimized financial health,
Ken
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