Hock Doc?

As a kid, I always loved to play Monopoly. It's great game for kids to learn, as it teaches basic economics very nicely. I used to play a lot with my cousin Keith, and we used a term when we had to mortgage properties to pay off our opponent. It was, (said it with glee of course) "Hock Doc." In other words mortgage your home to get money to pay your bills, or for other uses. Does it make sense? Maybe yes, and maybe no. Let's examine things.

If you want to take a vacation, buy a home, car, or gold and silver, there are a couple of things you must consider before borrowing money to buy them. Is the house a bargain, compared to recent comps, (comparables)? Is the real estate market where you are going to buy on the upswing, or downtrend? If the real estate market is headed downward, as it is in most places, wouldn't it be wise to wait till it reaches a lower level, if not the bottom, and then buy? Obviously, no one knows where a 'bottom' is, any more than one knows where a top in the stock market is, but there may be ways to give it a good guess. A hint may be that foreclosures are up 90% in the past year. To me, this means the bottom has yet to be reached. Some wags say real estate will go back to prices in the 1970's but I doubt that.

Are there a lot of 'for sale' signs in the neighborhood you are considering? If so, this means that prices have not reached any where near the bottom…probably anyway. In my town, I would say it is OK to buy, because it is a desirable place to live, crime wise, weather wise, humidity wise, and tax wise. And that is another thing you must consider: Is where you want to buy, the best place? If you are retired, or can make a living by use of the phone or computer, why live in a high tax, high humidity place? I happen to love Iowa! It is beautiful, but the weather I could not stand. Well below zero in winters, 100 or over with sweltering humidity in summers, I can't do. Wisconsin, Minnesota, New Jersey, New York, Massachusetts, etc are all very high real estate tax places. I have two clients who have moved here, from over a thousand dollar a month real estate taxes in Wisconsin and New Jersey, to far less than that per year, for an equal size and quality home. Think about it, and no, I am not even a member of the Chamber of Commerce. It just seems to me that west and south offer better weather and taxes than do the north and east. Consider all possibilities. Maybe you should move.

Don't ignore the stability of the neighborhood either. Is it going commercial or industrial? Is a slum area expanding in the direction of your purchase? Are the neighborhood demographics your age and income? If the area is full of old people, you can count on them dying and their homes going up for sale, possibly in the near future. Would this change the neighborhood? Do not ever buy in a bad neighborhood, as your property will simply go down over the years. Look for tell-tale graffiti, which is a bad sign. Is there excessive noise from closeness to a freeway, highway, airport, or railroad? These might make your home less valuable over the years, and at best an uncomfortable place to live. Schools close? Are they good schools? And of course remember that the property taxes being paid by the current owner, will certainly increase when you buy.

If you can't or won't move, then by all means look at local for sale signs, and even consult a realtor for his opinion. If you are a retiree, and considering a move, and you have the dollars to pay cash for a home, should you? If your retirement package is secure, you might consider it. Why not pay cash? I hate debt, and have no mortgage, but I have lots of silver and gold too, plus I am not retired. If your retirement is secure, and you'd like to have some cash to buy silver and gold, remember that the payments on a mortgage will never vary. The dollar value will go down, and prices up, but the payments in dollars will always be the same. On a 30 year mortgage, a thousand dollar a month payment might be severe now, but 20 years from now, a thousand dollars might buy but a few ounces of silver, while the mortgage payments remain the same. I'll absolutely guarantee you that over the period of the mortgage, the payments will be less and less burdensome, because the dollar will lose more and more value. I talk to people all the time who bought a home 25 years ago, and whose mortgage payments are so low as to be laughable. 25 years ago, they were what had to be done, and now they seem to be so cheap as to be ridiculous.

Property taxes will go up over the years, mortgage or not, so having a loan will make no difference. Shop for the lowest interest and points, and if you do get a mortgage, be sure the payments are principal and interest ONLY, and do not includes taxes and insurance. The tax and insurance escrow racket allows the mortgage company to use your money all year, and pay the bill at the end of the year, paying you no interest. Real estate, in the form of a home, mortgaged for 30 years, might be a good way to gradually save. All prices will go up over 30 years, and the payments will remain the same. Owning a home, if you are certain you are going to live there for a long time, makes sense, but not for a short period of time. If you are going to move in a couple of years, your job may transfer you, or other reasons, it might be wise to rent a home. The owner will repair it, paint it, and fix the roof and plumbing if you rent. Buying, for a short period of time might not be wise, because when you sell, you will usually have to pay 6% to a realtor to sell, plus closing costs. If you do a FSBO (for sale by owner), it may take a lot longer, and you will be denied the listing in an MLS (multiple listing ) book, which all sales people use to find a home for their customer. Rather than having you selling, a listing with a realtor will have hundreds trying to sell your home. Will the home go up enough in the few years you will be there to cover the costs of selling?

If you have examined all angles of buying, love the location, and will live there forever, be sure to get an appraisal and professional examination of the home before you make an offer or make that deposit. The seller should furnish an appraisal, so you can be sure it is fairly priced, and you can put that in your contract. You can also put in the contract that the home must pass examination by a professional home inspector. Maybe there are termites, bad foundation, faulty electrical, or iron pipe rather than copper. An inspector will check out all of this for a small price, compared to what it might save you if faults went undiscovered.

Should you mortgage your home to buy a car or take a vacation? I say absolutely no. Long after the vacation is gone but for the pictures, the payments will remain. Anyone who buys a new car today, is acting unwisely, I believe. Get a good used one with low mileage, warranty, and of a brand you like. It will cost a lot less, and you can pay for it. Often a used car can be bought for very low interest, if you don't have the cash. I suggest never going into any debt other than a home. My newest cars are two -1985 Mercedes, plus a 1974 and 1973. And oh yes,. I just bought a 1947 Jeep CJ2 for the pleasure of it. No new, or even close to new cars here. You've simply got to be smart in today's failing dollar, inflation, and economic situation. Mortgage to buy gold and silver? I can't say it is a bad idea, since gold and silver will obviously go up in dollar prices and a mortgage payment will remain the same. You can hardly lose, and the interest is deductible. I am not going to do it, as I like very much owing no one a single penny. But then I am an old man of 73, and at my feeble age, that security means a lot to me, and besides I am still working and have gold and silver. If you are young, are secure in your occupation, and have lots of home equity, I might do it, were I you. I'd at least consider it! If you do it, be sure to get mortgage insurance in case of personal disaster. Your decision, but in any way possible…protect yourself!

June 14, 2007

Don Stott has been a precious metals dealer since 1977, has written five books, hundreds of columns, and his web site is www.coloradogold.com