Buy gold or pay off mortgage?

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Corporal Jones's picture
Corporal Jones
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Buy gold or pay off mortgage?

Hi,

I'm new to this website but the discussions have really struck a chord with me.  I thought I'd reach out for some advice.  I don't currently have many investments as I've concentrated in paying my mortgage off.  Should I continue to do this or should I diversify into gold, commodities etc.

I'd be very grateful to hear peoples' thoughts on how folk in my situation can best prepare themselves for the uncertain future that seems to be fast approaching.

Cheers.

 

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Re: Buy gold or pay off mortgage?

Hi Corporal Jones,

Welcome to the site. I'll take a stab at your question.

As nobody can know the future, probably the best approach is to diversify your assets in preparation for the various possible outcomes. If you have never bought physical gold/silver before, its probably wise to do at at least once so that you are comfortable with the process. There are also many other "peace of mind" preparations that you should familiarize yourself with. They are listed in this thread:

Consolidated List of Links to Existing Preparation Threads

Its easy to become overwhelmed with all the information, but just remember that you have time to make any changes that you deem appropriate.

Also, paying off your mortgage is an excellent idea no matter what happens or doesn't happen.

All the best...Jeff

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Re: Buy gold or pay off mortgage?

I would add that if you are of the opinion that we are in for significant price inflation in the future, and you also hold a fixed rate mortgage, that you are better off paying the minimum payment each month.  If the dollar continues to weaken, your monthly mortgage payment will decrease in real purchasing power terms as the value of the dollar declines.  Of course that line of thinking works in reverse if we experience massive deflation....which could be hedged to some degree by owning gold, which typically does well in deflation.

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Re: Buy gold or pay off mortgage?

And to add to crazyhorse, if inflation occurs as he states gold/silver will become more valuable.  As has been stated many times, during the Wiemar Republic episode people were buying whole apartment buildings with 1oz of gold.  Not that this will happen here but why not hedge yourself.  I honestly couldn't imagine being without my PM's.  Pray you never have to use them but have them on hand just in case.  You can always sell them if you need them later to pay off your mortgage.  If you never use them, your children will be a damn bit more excited to see gold come spilling out of the safe than paper money when you pass!

Welcome to the site!

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Re: Buy gold or pay off mortgage?

Hey Corporal Jones!,

Welcome to the sight. IMO no portfolio should be without some position in PMs, no matter how small that position might be. JAG also makes a good point in that it would be a good idea to simply familiarize yourself with the process of buying PMs. Call some PM dealers in your area. Find out what their rates are. Find out what their personailites are like. Drive out to meet them and buy a single oz. of silver for $20 or so just to see what it feels like. 

As much as I respect the posters of this forum, (including myself) I probably wouldn't make any big investment decisions based on their advice alone.

Just a quick comment on crazy horse's comment:

crazyhorse wrote:

I would add that if you are of the opinion that we are in for significant price inflation in the future, and you also hold a fixed rate mortgage, that you are better off paying the minimum payment each month.  If the dollar continues to weaken, your monthly mortgage payment will decrease in real purchasing power terms as the value of the dollar declines.  Of course that line of thinking works in reverse if we experience massive deflation....which could be hedged to some degree by owning gold, which typically does well in deflation.

In my opinion the deflationary scenario would be far more painful to someone in CJ's shoes than the inflationary one were he to protract his loan payments to the maximum extent possible. I'd much rather feel foolish in an hyper inflationary environment about paying off my loan too quickly than to be weighted down and possibly ruined by crushing debt in a deflationary environment.

Also, CH's point about mortgage payments "decreasing in real purchasing power" is true but only relevant if CJ's income also increases in tandem with or ahead of inflation.

At the end of the day, whether it ends up being deflation or inflation, debt still is and always has been a claim on future earnings.

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Re: Buy gold or pay off mortgage?

I too am a new to the site...I/we own small apartment communities and we have recently decided the stock market isn't for us and we've paid off two small apartments with a nice increase in income...some friends have said they thought it wasn't a smart thing to do as stocks will go up...for us, however, it feels right and our apartments are mostly student occupied and in great locations...at some future date we plan to sell them little by little holding the notes with a 30 to 40% down...we will be the bank and it appears the only people who got money were the banks...again it just feels right although very conservative.

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Re: Buy gold or pay off mortgage?

Welcome!

Great investment IMO.  We have many rental properties and anything that's bringing in cash flow is a good thing.  Next you may want to look at properties with a little land.  Not talking acres but something with a yard at least.  Diversification in property ownership is as important as diversification in any other investment.

Also, I appreciate your attitude toward the market.  Many people on this site are investors in Wall Street but myself, I couldn't stomach it any longer.  And as you stated "it feels right", I agree!  Just like playing on the playground with a bully...You know it's not right to continue to play with him but you still do it.....not right.  I can't morally invest in a system that has those people involved no matter how much money I may lose.  

Cheers!

 

rdkeene wrote:

I too am a new to the site...I/we own small apartment communities and we have recently decided the stock market isn't for us and we've paid off two small apartments with a nice increase in income...some friends have said they thought it wasn't a smart thing to do as stocks will go up...for us, however, it feels right and our apartments are mostly student occupied and in great locations...at some future date we plan to sell them little by little holding the notes with a 30 to 40% down...we will be the bank and it appears the only people who got money were the banks...again it just feels right although very conservative.

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Re: Buy gold or pay off mortgage?

LogansRun wrote:

As has been stated many times, during the Wiemar Republic episode people were buying whole apartment buildings with 1oz of gold.

Is that really true?   I can understand how 1 oz of gold could pay off an apartment buildings debt that was incurred before the hyperinflation but it makes no sense to me for that to be the case in general.  Why would someone sell an apartment building (clearly has utility value) under any circumstances for only one once of gold?  Gold can not provide shelter from the elements and is not necessary for life.

The only way I could imagine this happening is if the market for gold was like the market for tulips in Holland during tulip mania.

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Re: Buy gold or pay off mortgage?

Gold may not provide shelter from the elements or be necessary for life but it is liquid and easily transportable (unlike the apartment buildings). A family that might still have outstanding debt tied up in the apartment building, see the deterioration in the economic and political situation in Germany, and decide to cut their losses and leave the country at that time, might sell the building for that price needing the gold to buy transportation out of the country ... or they may just have needed the gold to buy food to survive.  

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Re: Buy gold or pay off mortgage?

AO wrote:

Gold may not provide shelter from the elements or be necessary for life but it is liquid and easily transportable (unlike the apartment buildings).  A family that might still have outstanding debt tied up in the apartment building, see the deterioration in the economic and political situation in Germany, and decide to cut their losses and leave the country at that time, might sell the building for that price needing the gold to buy transportation out of the country ... or they may just have needed the gold to buy food to survive.

But the situation you describe is not buying an apartment building for 1oz of gold.  If you have already have a fixed debt, you may be able to pay it off in the future with 1oz of gold in hyper inflated dollars, but that is not the same as buying an apartment building for 1oz of gold.  Nor is an example of a jewish family that sells their assets for below market value because they fear for their life and property.

Does anyone here really think that in America's future they will be able to BUY a home (not payoff an already incurred debt) with a few ounces of gold?  I don't see how that is ever going to happen.

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Re: Buy gold or pay off mortgage?
goes211 wrote:

Does anyone here really think that in America's future they will be able to BUY a home (not payoff an already incurred debt) with a few ounces of gold?  I don't see how that is ever going to happen.

 

It's already happened.  Have you seen the real estate prices in Detroit?  1oz or less will buy a home in some areas. 

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Re: Buy gold or pay off mortgage?
goes211 wrote:

Does anyone here really think that in America's future they will be able to BUY a home (not payoff an already incurred debt) with a few ounces of gold?  I don't see how that is ever going to happen.

+1

Even if the price of gold rises to $50,000/oz, that $50,000 will only by you what $1,000 buys you today. 

Besides, if your betting on hyperinflation to pay off your debts, your in for a world of hurt. 

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Re: Buy gold or pay off mortgage?

It's already happened.  Have you seen the real estate prices in Detroit?  1oz or less will buy a home in some areas.

I would not consider that really buying a house for 1oz of gold.  Effectively they are giving away homes because owning a home in Detroit is is not gaining an asset, it is gaining a liability.

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Re: Buy gold or pay off mortgage?

Jeff wrote:

Even if the price of gold rises to $50,000/oz, that $50,000 will only by you what $1,000 buys you today. 

Besides, if your betting on hyperinflation to pay off your debts, your in for a world of hurt.

I could not agree more. 

I just get the impression that many people think that their gold will someday be able to buy them large quantities of hard assets (homes, land, cars, ...) are not understanding what this type of inflation will actually do.

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Re: Buy gold or pay off mortgage?

I would hope no one is thinking or hoping that their gold "horde" will pay for a home or property in the future (ie: 1oz for a house).  But I do believe that if you're looking for an investment that's opposite of fiat currency, then Gold and Silver are it.  As I've stated before, I don't buy gold as an investment to make a profit.  I buy Gold and Silver to protect the value of my earnings.  If you have the mindset that you are hoping to hold onto your PM's until they are absolutely necessary/survival or to hand down to your children...then by all means do it.  But if you're buying to hopefully trade it in later for more funny money then IMO, you're not buying for the right reasons.  

And as for JAG's comments concerning the value of Gold.  I disagree.  Gold was at $700 oz in Nov. of 2008.  It's now at $1000.  Has the price of goods and services increased by 30%+?  Nope.  What happens if the dollar is suddenly devalued by 50% by the gov't?  Gold will probably go much higher than 50% at that time.  What do you think the value of gold would be if the US Dollar suddenly lost it's "World Currency" status?  Gold would increase dramatically while prices of goods would either stay the same or decrease.  

And "yes", people were actually buying properties with Gold that they could not afford with their Hyper Inflated Fiat Currency.

http://en.wikipedia.org/wiki/Inflation_in_the_Weimar_Republic

http://en.wikipedia.org/wiki/Hyperinflation

It happened again during the crisis in Argentina a few years back.

http://en.wikipedia.org/wiki/Argentine_economic_crisis_(1999–2002)

Again, I'm not hoping to ever use my gold or silver.  I want to hand it down to my children and grandchildren.  But I do feel much safer in the case of economic collapse that I'll be able to feed my family and be much better off than 95% of the population because I am a PM owner.

Good luck!

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Re: Buy gold or pay off mortgage?

LoganRun wrote:

I would hope no one is thinking or hoping that their gold "horde" will pay for a home or property in the future (ie: 1oz for a house).  But I do believe that if you're looking for an investment that's opposite of fiat currency, then Gold and Silver are it.  As I've stated before, I don't buy gold as an investment to make a profit.  I buy Gold and Silver to protect the value of my earnings.  If you have the mindset that you are hoping to hold onto your PM's until they are absolutely necessary/survival or to hand down to your children...then by all means do it.  But if you're buying to hopefully trade it in later for more funny money then IMO, you're not buying for the right reasons.  ...

(some deleted)

Again, I'm not hoping to ever use my gold or silver.  I want to hand it down to my children and grandchildren.  But I do feel much safer in the case of economic collapse that I'll be able to feed my family and be much better off than 95% of the population because I am a PM owner.

I agree 100%

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Re: Buy gold or pay off mortgage?
LogansRun wrote:

And as for JAG's comments concerning the value of Gold.  I disagree.  Gold was at $700 oz in Nov. of 2008.  It's now at $1000.  Has the price of goods and services increased by 30%+?  Nope.  

LR, The price of gold in the early eighties was $850/oz. In 2001 it was roughly $250/oz. Did the price of goods and services decline by 70% over those two decades? Nope.

That being said, I really can find no fault with your personal approach and in fact I walk a similar path..

Too bad Corporal Jones is not around to take part in this conversation.

All the best....Jeff

(edit: I forgot to include the whole point of my freaking post....perhaps we are all wrong about projecting uncertain relationships between gold and other assets into the future, especially me.)

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Re: Buy gold or pay off mortgage?

Jag,

No disagreement.  The value of gold is different to everyone.  To me, it's priceless.  No matter what the market states it's $ value, it's worth much more to me.  Probably how many of us feel.  It's funny for me to see discussions concerning the $ value of PM's as I just don't care.  But I will say, if it ever comes to the point that an oz of Au buys a house (not in Detroit;-), I'll use some to buy up a bit of realestate.  

Gold Ownership = Comfort

Best as always!

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Re: Buy gold or pay off mortgage?

If you are a believer in half of what Martenson is saying, I just cant see how gold will have any value.  We will be fighting for survival and the last thing I will want to trade for is something than is only used for jewelry.  If we see major economic decline, people will focus more and more on day to day items that are needed to survive.  Gold is in no way part of this equation.

Historicaly, gold has held its worth.  But, historicaly people have been much more in touch with how to survive, how to farm, how to live off the land.  So, in times of dramatic change surviving would have been easier than it will be in this era if the dramatic collapses predicted on this site come anywhere near coming true.  Because of this, I just cant get my head around why to buy any gold or silver.

just food for thought.  I guess if the thesis of this site is that this time is truely different, it holds then that the historical reasons for buying gold might not hold now either right?

 

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Re: Buy gold or pay off mortgage?
rickets wrote:

If you are a believer in half of what Martenson is saying, I just cant see how gold will have any value.  We will be fighting for survival and the last thing I will want to trade for is something than is only used for jewelry.  If we see major economic decline, people will focus more and more on day to day items that are needed to survive.  Gold is in no way part of this equation.

Historicaly, gold has held its worth.  But, historicaly people have been much more in touch with how to survive, how to farm, how to live off the land.  So, in times of dramatic change surviving would have been easier than it will be in this era if the dramatic collapses predicted on this site come anywhere near coming true.  Because of this, I just cant get my head around why to buy any gold or silver.

just food for thought.  I guess if the thesis of this site is that this time is truely different, it holds then that the historical reasons for buying gold might not hold now either right?

 

 

You  might want to check out this video  "Gold For Bread" about trading using gold in Zimbabwe

 

 

 

 

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Re: Buy gold or pay off mortgage?

Thanks for all your input.  (Apologies to JAG for not keeping on top of this thread!)

Paying off the mortgage seems like it makes sense whatever may be lurking in the future but it does leave me with all my eggs in one basket.

I think I'll try to dip my toe into the PM water in the future, I'll have to use my 'Great' British Pound to do it though and Gold is looking pretty expensive from this side of the pond.

If you're interested in getting some economic commentary from the UK here are some links to people I've found very useful for explaining what's going on.  To ensure balance these guys both write in the same paper but take completely different sides on the Inflation/Deflation debate.

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/

http://www.telegraph.co.uk/finance/comment/liamhalligan/

Keep up the good work.

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Re: Buy gold or pay off mortgage?

No arguments on your thought process.  In prepping for the downward spiral of society as we know it, taking all of those issues into account is well worth the time.   If you peruse the posts and threads on this site from the past you'll find that most of us are thinking in the same direction.  But I'm not going to ever discount the value of gold in any environment.  It's done the job of helping people survive for thousands of years.  Gold is Gold and IMO it's been bred into the human psych to WANT it.  But I also have a good supply of land, food, water, ammo, and other rare items that I think may be worth trade in the future.

 

 

 

rickets wrote:

If you are a believer in half of what Martenson is saying, I just cant see how gold will have any value.  We will be fighting for survival and the last thing I will want to trade for is something than is only used for jewelry.  If we see major economic decline, people will focus more and more on day to day items that are needed to survive.  Gold is in no way part of this equation.

Historicaly, gold has held its worth.  But, historicaly people have been much more in touch with how to survive, how to farm, how to live off the land.  So, in times of dramatic change surviving would have been easier than it will be in this era if the dramatic collapses predicted on this site come anywhere near coming true.  Because of this, I just cant get my head around why to buy any gold or silver.

just food for thought.  I guess if the thesis of this site is that this time is truely different, it holds then that the historical reasons for buying gold might not hold now either right?

 

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Re: Buy gold or pay off mortgage?
rickets wrote:

just food for thought.  I guess if the thesis of this site is that this time is truely different, it holds then that the historical reasons for buying gold might not hold now either right?

That's true, but the key word is 'might'.  Getting the basic living essentials first only makes sense, but in most probable outcomes there will still be need of some sort of currency or store of value, and gold is a prime (though not the only) candidate.  I think CM hit the nail on the head when he said we can expect a move from the highly complex economies to less complex economies in the years to come.  Of all the economic predictions that I've ever come across that one struck me as probably the best and most accurate.  At the same time it's also quite vague, but considering the fluid nature of current events it pretty much has to be.  So it's all a matter of degree, and the drop in economic complexity could range anywhere from a mild reduction in global trade and demise of a few of the most-complex financial instruments, all the way down to a level where the economy consists entirely of barter for basic essential goods, forceful negotiations (i.e. clubbing them over the head with ancient espresso machines and Thigh-masters), and marrying off one's daughter in exchange for ten goats and a crate of toilet paper (the 2-ply kind if she's a real catchLaughing).  As with most things the truth will probably lie in the middle.  Hopefully not so much in the 'trading toilet paper for your daughter's hand in marriage' direction Wink.

- Nickbert  

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Re: Buy gold or pay off mortgage?

I would not be too quick to pay off most mortgages early.  The value of the dollar has been steadily dropping and it looks like this trend will continue for at least some months to come.  If you can decouple from the dollar decline (PMs etc) and hold the relative value of your accumulated wealth, the cost of your home in real terns is dropping with the dollar.  

I'm not sure how far along your amortized interest and principal schedule you are but don't forget that mortgage interest can be deducted.  Tax brackets:

  • $8,025 = 10%, $32,550 = 15%,  $78,850 = 25%, $164,550 = 28%,  $357,700 = 33%,  Above = 35%

For example, if your adjusted gross income is $50,000 (25% bracket) and you paid $10,000 of interest, your taxable income would be reduced to $40,000.  As you advance towards the last 5% of your amortized schedule, the amount of principal is greatly increased as a percentage of your total yearly payments.  

One last thing to think about...it is highly unlikely that you would be able to gain "allodial title" to your home even if you pay it off.  And, as of 1933, Federal Reserve Notes are solely backed by the productivity of the people and their private property.  Every dollar of debt in the United States is ultimately owed to the Federal Reserve.  If the country goes bankrupt (again) they will collect their collateral.

Would you be thrown out of your home?  Not likely, but property taxes may sky rocket as you would essentially be renting the home you own from the Federal Reserve via taxes.  If you own your home via a deed, it can be taken if you fall delinquent on your taxes or other debt.

Larry  

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Re: Buy gold or pay off mortgage?

Not having a mortgage, I don't usually follow the "mortgage" threads closely, so I may have missed the posting of this excerpt from Mish's newsletter, also publicly posted on Minyanville:

Posted: 02 Oct 2009 08:06 PM PDT

Here is an email from "FJ" regarding his attempt to enter the mortgage modification program at Fannie Mae. "FJ" writes:

Hey Mish,

I always found it humorous when you posted people's dealing with their mortgage lender, hence my personal submission.

We applied for Fannie Mae's mortgage modification program only to be denied during the probation period for paying too early. Evidently, paying your mortgage one day early signifies an "over willingness" to pay (i.e. keep current) and from FNM's perspective. That means you can afford the original payment.

Here was my response:

"Look man, I'm on my second layoff in 2 1/2 years and my wife's company is hanging by a thread so I think I'll stop paying you now. For the next 6-12 months I'll save what would normally be spent on carrying/maintaining our underwater mortgage, while you run through the process of foreclosing.

My loan's non-recourse so no worries there. And we'll have no problem renting a home just as nice for 1/3 the cost. The way I see it, I need incentives to stay."

And that's where I left it.

FJ

"FJ" if you can really rent for 1/3 the cost you should get some professional advice about walking.

Note that the lenders (Fannie Mae, Freddie Mac, Bank of America, Wells Fargo, etc.) are stuck in a Morton's Fork.

Once someone decides to stop paying, the loan may be irrecoverable no matter what incentives the lender offers down the road. On the other hand, if the lender offers new terms to anyone who asks, everyone will ask. Either way the lender loses. Moreover, the lender may not easily be able to figure out which option is worse.

The only time the lender is not forked is when someone has a lot of equity in the house issues a threat. Otherwise the lender has to choose between two very unpleasant alternatives, perhaps without even being aware.

 
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Re: Buy gold or pay off mortgage?
goes211 wrote:

Does anyone here really think that in America's future they will be able to BUY a home (not payoff an already incurred debt) with a few ounces of gold?  I don't see how that is ever going to happen.

Absolutely, gold is rare and most people will, at most, own nothing more then a few grams of .999 bullion.  And, unfortunately home will not be able to hold on to current values.  Home values might very well devalue to below pre-bubble prices, conversely gold may rise to $15,000 + an oz. at which time a few oz's of gold will pay off your 30 year mortgage.  BUT, if things get that serious, and you live in an urban or suburban area, most of your nieghbors will have abandoned or be sqautting on bank owned property so you will more or less be forced into leaving your property too.  But, as Chris M. points out, 1oz of gold should buy you 1 acre of workable land... but it's your money.

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Re: Buy gold or pay off mortgage?

If this falls into the category of fruitless speculation (or just plain stupid) then I apologize.   But it seems there is reason to believe that a government in stress, run by persons of doubtful integrity and intelligence, might simply move in and change the rules of the game "to preserve the stability of the nation".   Any chance we might see the "Inflation Adjusted Mortgage Act of 2013" in which banks are allowed to adjust one's "fixed rate" mortgage payment ("freedom is slavery", "fixed is adjustable")?  Or could it go like this:  Your loan required you to make payments in U.S. dollars, but that currency no longer exists, so you must now make your monthly payments in the new currency, the "Rypoff".   Your old payment of $2,300/month is now R18,000/month.

I do have some mortgage payments and my thinking now is to make my payments and not make any effort to pay things off early.   But I suspect I will be paying off these mortgages sometime before the S hits the F.   Because I think (purely opinion) that when and if the S does hit the F, I will no longer have any ability to predict how governments will react or what new rules will be enforced, and at that point my options might be quite limited. 

My preparations for any scenario are going pretty well. Having benefitted greatly from CM and all of you, my attention these days is directed more outward (more "offense", less "defense") to see what I can do to stop the insanity.  No, I don't have any superhero illusions, I'm just trying to do something because doing nothing makes me crazy.

 

 

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Re: Buy gold or pay off mortgage?
ltlredwagon wrote:

If this falls into the category of fruitless speculation (or just plain stupid) then I apologize.   But it seems there is reason to believe that a government in stress, run by persons of doubtful integrity and intelligence, might simply move in and change the rules of the game "to preserve the stability of the nation".   Any chance we might see the "Inflation Adjusted Mortgage Act of 2013" in which banks are allowed to adjust one's "fixed rate" mortgage payment ("freedom is slavery", "fixed is adjustable")?  Or could it go like this:  Your loan required you to make payments in U.S. dollars, but that currency no longer exists, so you must now make your monthly payments in the new currency, the "Rypoff".   Your old payment of $2,300/month is now R18,000/month.

I've been thinking that same thing for a while now too.  It's all just speculation at this point and by no means certain to happen (voting for such an act could potentially be political suicide for those in congress or the president), but if things get bad enough I could see that as a fair possibility.  It's one of several reasons I'm not buying real estate at this point; if I can't buy it outright or within 2 years, then no thanks.  I already have one substantial fixed-rate debt, a disgustingly low fixed-rate consolidated student loan that I'm paying the minimums on.  I'll soon have enough to be able to pay that all off in one lump, but for now I've been putting all that money in PM's and as cash.  I think it's unlikely that they'll be able to pull something like that off, if they even can, without any warning signs at all (at least for those paying attention).  The minute I see such a warning sign I'll pull the trigger and pay it all off.  But I think it would take a more prolonged economic beat-down to get the government to that point, so IMHO it's probably a medium to long-term risk.  I MIGHT be willing to take on some mortgage debt if I saw a great opportunity for some good land in a great community, but at this point for me that would need to be a killer deal.

To expand the scope of this a little further beyond fixed-rate loans, I think we should consider the possibilities of those in charge "changing the rules" in all the other aspects of our financial lives.  Credit cards, 401k's, IRA's, stocks, taxes.... I think any "rule changing" legislation would likely have a wide scope and affect far more than just our mortgages, and perhaps be combined with some job stimulus package to give it a pretty face.  Personally I think the best course of action is to simply reduce one's participation in the financial and banking systems altogether to just a minimal level.  Have enough participation in the game to do some basic things (like, say having one bank account or credit card to pay the enrolled member dues at this fine site...Wink), but not so much that a change of the rules or collapse of the financial system will bring me to total ruin.  I know this really isn't a long-term solution as there is more than our finances at stake, but at least it's something useful to do while we struggle with how to address the true source of the problem.

- Nickbert

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