THIS IS ADRESSING TRADITIONAL MORTGAGES, BUT IT HELPS US UNDERSTAND WHY WE NEED AVAILABLE CASH (if you are over 62 you can get that through a Reverse Loan (HECM)!
As a mortgage professional, many folks have told me they want to get rid of their mortgage as fast as possible, because then they will be “safe”. They say they want to own the house and make sure the bank doesn’t own it! While it may be the best thing for an undisciplined saver to pay off their house so they have some “savings”, it is generally not a good idea for the disciplined financial person. It is also not the safest thing to have too much of your net worth tied up in your home equity in case disaster strikes. Millionaires don’t pay off their homes. In Ric Edelman’s book, Ordinary People, Extraordinary Wealth, he has an entire section devoted to why 85% of millionaires have mortgages.
So, let’s look at the whole safety thing and what happens in a disaster with smaller mortgage balances.
Disaster # 1: Disability: If your income or your spouse’s income stopped tomorrow and adequate disability insurance was not in place for long term, how long would you be able to make your other bills before major changes took place? Let’s say you have not pre-paid principal and you have 50,000 in a liquid safe side account and your house payment was $1000 per month. That means you could make your payment for up to 50 months (over 4 years) while you decided what to do. So, does the bank own the house? No, you do. You just have to make the payments; you don’t have to pay off the whole mortgage at one time.
Disaster #2: Bankruptcy: If everything went wrong and you had to file for bankruptcy in a worse case scenario, the law says that if you have more than $40,000 worth of equity in your home in Wisconsin, you must sell it or not file at all. If you don’t have that much equity, you can reaffirm your mortgage payment and stay in your home. If your safe side account of 50 or 150,000 is in life insurance contracts or IRAs, 401ks, they are exempt from bankruptcy and you can keep it in order to ride out the storm. If you have a 150,000 home and it is paid off or mostly paid off—you must sell it to pay creditors.
Disaster#3 Real Estate Market Crash: If your home is worth 200.000 today and you pay it off with cash that you have in hand and the market goes down 50% tomorrow, your net worth is down to 100,000. However, if you refinanced your house and had 200,000 in a safe side account that was liquid and your house dropped to 100,000 and you don’t sell, you still have the 200,000 of cash to use. If you don’t sell your house, you have lost nothing and still have full use of the cash inside of the house. In fact, likely you would have the opportunity to use your cash to buy real estate at bargain basement prices and wait for the market to come back as it always has in this country for as long as records have been kept. (During the 1940’s fortunes were made in real estate by people who bought in a low market in the 30’s.
This is a complex subject which is hard to address in one column, and you should consult a qualified financial advisor for your overall situation. However, just looking at these 3 disasters above, you can see that having your home paid off is not always the best thing and certainly not the “safest” thing.
Reverse Mortgage Man
http://www.moneywise123.com/
(866) 800-0280
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