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Thoughts on mortgages

December 28th, 2005 at 11:46 am

I was working on an entry about this, but I'm pretty sure I never posted it. In honor of Flash's brother, I figured I'd post it now.

First, a story from way back. I recently read the biography of a forgotten radio personality, Mary Margaret McBride. ("It's one o'clock, and here's Mary Margaret McBride", by Susan Ware.) Like a lot of other people back in the 1920's, she'd invested in the stock market. Based on the wealth she had "on paper", she'd decided to lease a luxury apartment in NYC, and took out a mortgage to buy her parents a home in Florida.

After the stock market crashed in 1929, any savings and investments she had left went for living expenses, because business had slowed down and she wasn't getting much work. she'd been getting up to $2000 or more for writing magazine features, and after the Depression really set in, she was lucky to get $50 an article. (This was before her radio career.)

She was still stuck with trying to pay the mortgage on her parents' house. Luckily she was able to get out of her expensive apartment lease.

A more recent story (I'm figuring this probably happened around the 1987 crash.) DMom got into a discussion about investing with her auto mechanic, and he told her his sad story. He'd saved for years to start his own repair shop and finally had over $100,000--enough at that time to pay outright for a business property he liked. A friend convinced him it didn't make sense to pay cash for the property--it would be smarter to get a mortgage and invest the money instead. He followed the friend's advice, apparently down to which investments to purchase.

The stocks went down, and he ended up losing practically everything--except of course the mortgage that was still hanging over his head.

On the other hand, I don't ever remember hearing that someone regretted paying off their mortgage early, instead of getting in on a "bull market."

When money is tight for us, and I see how other people are living, I think about how much equity we supposedly have in the house. It would be so easy to access some cash by refinancing or getting a home equity loan. We could remodel the house, get some professional landscaping done, and replace DH's poor old car. Or, we could sell our funny old house, get a new interest-only mortgage and stretch to buy a newer one.

But those stories have reminded me that WHILE A MORTGAGE IS REAL AND HAS TO BE PAID BACK NO MATTER WHAT, ALL THAT 'EQUITY' ISN'T REALLY REAL. It's strictly based on what people might pay for the house in current market conditions. Being mortgaged to the hilt when the real estate bubble bursts could be as disastrous as it was back in 1929 or 1987, if you had margin loans against stocks. Even having to pay a small mortgage payment would be a problem if the economy goes bad and you can't get a job.

Another thought, after the recent hurricanes. I would think you'd be in much better shape if your house was paid off--even if you lost it. If you are lucky enough to have insurance that covers something like this, or even help from FEMA, a lot of the money would go toward paying off the original mortgage, I would think. You wouldn't have all that much to start over with, and have to start paying on a new mortgage all over again. Whereas if the house were paid for, you could start fresh, not owing anything.

In addition, in the case of a hurricane, fire, etc. it would be better to have money in the bank than be counting on helocs or home equity lines of credit for emergencies or spending money. If the house is gone or severely damaged, you probably couldn't access that money anymore.

I sure wish I could figure out a way to start paying ours off faster, but we have other things to handle at the moment. At least I do know that if a really big windfall ever comes our way, paying off the house will be one of my top priorities. No matter what the financial experts say.




Watching the housing bubble from next door

August 28th, 2005 at 09:44 pm

Back in the spring, our next-door neighbor died and her children put it up for sale. It finally sold last month for $170,000. (I checked the sale price on http://www.domania.com ) Then there was a flurry of activity for several weeks. Old heater out, new heater and central a/c in. Carpeting out, wood floors refinished. New windows. Paint slapped on a nice natural stone front, I assume because it was the cheapest way to spruce it up. A one-day whirlwind of landscaping, much of which will have to be torn out by the new owner anyway. A tree planted one foot from the house isn't going to be able to stay there long.

They had an open house today, so DH and I walked over. The asking price is now $239,900. I've been involved with some home renovations here and at DMom's house, so I do have a vague idea of how much all those projects probably cost. I can't see it being over $15,000, assuming the "investor" did some of the work himself. DH says maybe more like $30,000. Even at that rate, they are trying to make nearly $40,000 in profit in about 6 weeks. I don't know, it sounds a bit outrageous to me!

I noticed something on Domania.com that made me do some further research. The sale prices on houses in my neighborhood are now about double what the assessed values are for property taxes. Our property valuations were last done in 1993, and are now completely out of whack. What I found out was, here in NJ the valuations can only change when you do something like build an addition, or when all the houses in a town are reassessed. And if the assessed *value* doubles, your town's tax *rate* is supposed to go down, so you still end up paying about the same.

Now I can add one more thing to my (short) list of good things about living in New Jersey. There's the shore, and the fact that we don't have to pump our own gas. Now it looks like even though taxes feel high, the property tax system isn't as horrible as it is in some states. Apparently in other states, when your assessed value doubles, your taxes actually do double, too. I also found out that in some places, a house is revalued whenever it's sold. So when house prices rise, you may end up trapped in your house--when you try to buy another house, you find the taxes will be 2x to 3x what your current taxes are, making a move unaffordable.

The experts keep talking about how more people will end up in foreclosure if they have ARMs and can't handle the payments if rates go up. I can't help but wonder now how many will lose houses because of property taxes zooming up.