How important is debt elimination right now?

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Rojelio's picture
Rojelio
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How important is debt elimination right now?

Let's assume peak oil is real and hyperinflation is coming soon. How important is it to eliminate debt from your life right now?

My mortgage debt load  is manageable unless I lose my job. However my $172K mortgage on a presumably $275K house cannot easily be paid off in the next 5 years, especially if one wants to buy guns, gold, medicine, food, water purifiers etc....

I'm new so my apologies if this has been posted already.

Dogs_In_A_Pile's picture
Dogs_In_A_Pile
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Re: How important is debt elimination right now?

A couple of thoughts regarding debt elimination.

"They" can't take what's yours so if your house is paid off "they" can't take it from you.  I'd keep paying your mortgage as you currently do, but factor in expenses for preparations.  Every now and then, throw a little extra at the mortgage to pay the principal down.  You can easily find your sweet spot when it comes to dividing up your extra money between preparation expenses and debt reduction/elimination.

I don't think anyone will disagree that paying off all debt is the best approach, but most aren't in a position to do that.  You just need to find the right mix.

Just how you determine your mix is going to largely depend on the urgency of your planning and what you think the transition and decline to the end state is going to be.

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Stan Robertson
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Re: How important is debt elimination right now?
Rojelio wrote:

Let's assume peak oil is real and hyperinflation is coming soon. How important is it to eliminate debt from your life right now?

My mortgage debt load  is manageable unless I lose my job. However my $172K mortgage on a presumably $275K house cannot easily be paid off in the next 5 years, especially if one wants to buy guns, gold, medicine, food, water purifiers etc....

I'm new so my apologies if this has been posted already.

It depends on how soon "soon" is. If actual hyperinflation occurs in the next year or two, the best bet would be to have some gold in hand. When hyperinflation reaches the level at which you can part with enough gold to pay off the house, then you can pay it off.  If merely moderate inflation, say 7% to 10% per year, continues for a good while, then it would seem to be better to be leveraged to the hilt with a low fixed interest rate loan.  Let the inflation pay off you house. A lot of folks did that back in the 70s. As Daniel Amerman says, inflation doesn't destroy wealth, it merely transfers it from lenders to debtors and governments.

 

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Jim H
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Re: How important is debt elimination right now?

Personally, I would much rather put my extra cash into (what I believe will be) appreciating assets like Gold and Silver, as well as increased energy independence, vs prepaying my mortgage.  I expect my house to continue to be a depreciating asset, though I still have pretty solid positive equity.  If all hell breaks loose, and I lose my job, and I think I might lose my house... then I will decide whether to cash out PM's and save the house.  I may choose to become a renter though.   

Note that you can lose your house even if it's paid off.... taxes can still be quite a load if you don't have a job. 

While I would strongly urge anyone to get out of revolving debt (credit card) hell ASAP... I personally see no reason to pay ahead my 5% mortgage at present.             

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txgirl69
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Re: How important is debt elimination right now?

 

Hi ya'll - Jim, you just answered my thought/question.....the taxes on a home have to be kept up or else big brother may take it. But, what would the gov't do with all those homes? Are they just going to oust citizens? How did we get to this point?!

Jim H's picture
Jim H
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Re: How important is debt elimination right now?

Hello Texas,  Given that most municipalities are in trouble... I would not expect too much leniency from them in the future.. their job will be to get your house back on the tax roles.  Most people who own a house outright would sell (for something) prior to getting kicked out... I would think.  

http://www.businessinsider.com/first-city-pensions-insolvent-2010-12  

Our deflationist friends at TAE are about the most pessimistic as far as future house prices go;

http://theautomaticearth.blogspot.com/2010/12/december-23-2010-about-tha...

I don't know that house prices will decline that much, but I do think they will decline more from here, even as we experience increasing prices for many things we need (food, energy).  

 

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joemanc
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Re: How important is debt elimination right now?
Dogs_In_A_Pile wrote:

Every now and then, throw a little extra at the mortgage to pay the principal down.  You can easily find your sweet spot when it comes to dividing up your extra money between preparation expenses and debt reduction/elimination.

One thing you can do, that I do, is to adjust your tax witholdings so that instead of lending the government money for free for a year because of the mortgage interest tax deduction, you would get an additional bump in your paycheck per pay period. I take this money, that I wouldn't have seen otherwise, and apply it towards the principle.

derfman64's picture
derfman64
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Re: How important is debt elimination right now?

Rojelio,

You may want to keep your options open and start preparing for a deflationary period. If you are correct about hyper inflation then, as I understand the theory, your debt will be easy to manage. That's probably my main reason for not believing in it (and also the reasons spelled out by people like Mish and Stoneleigh).

I have recently sold my home (I am in Canada) and will be cashing out the equity at the end of Jan. I have read this site everyday for a year now and have the utmost respect for Dr M and most of the posters here. That is the main reason I plan to stay liquid and be able to move should I be wrong. I do not believe in the commodity bubble that is going on currently. "Demand" as I understand it, is not neccessarily countries stock piling or companies replenishing their stock, but also speculators making bets.

I own and plan on buying more precious metals as I believe they will retain their value either way. The price may drop in deflation but what they will be able to purchase should increase or stay the same.

I believe it's no longer about making money (investments) but retaining it.

Remeber always that the value of an asset  (house price, stock price etc....) is what some one will give you in the present. Just because a house sold for $700 000 5 years ago......you know the rest. I work in a Casino (hey , it's a job) and everyday I see people who don't know when to take their chips off the table and go cash out. They chase the "next level" (ie they are up 800 but want $1000) or last weeks loses. Inevitably they end up broke. If some one offered you $350 000 four years ago ( if you were in one of the badest hit areas) you would not have done it because someone sold their place down the street for $400 000....and housing prices always go upUndecided

All I am trying to say is keep reading and listen to all possibilities. I would never tell you to do what I did but I will tell you what I did and why. Go with your gut, don't buy into Conpiracy theories and ask yourself what makes sense. Dr M once quoted Stoneleigh and I completely buy into it. "People rationalize but they are not rational"

Monday morning quarterbacks will be crushed wtshtf

Rojelio's picture
Rojelio
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Posts: 38
Re: How important is debt elimination right now?

Thanks for your insight. I assume one can have deflation (e.g, houses) and inflation (food) at the same time? I'm not sure if Chris M predicts hyperinflation, but I've listened to various experts who seem to be very credible, like Peter Schiff and the National Inflation association for example, who are predicting this.

You mentioned that debt would be easier to manage with inflation? That's only if all of us peasants have access to newly minted million dollar bills, right? I've seen the pictures of Zimbabwe, Weimar republic etc... which seem to suggest that citizens have access to wheelbarrows of cash somehow. But is this necessarily the case? Can we imagine a scenario where the money is devalued yet our paychecks don't change accordingly?

 

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Pops
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Re: How important is debt elimination right now?

I'm no expert but just like "price" only matters if you are buying or selling, "inflation" only matters if you have or need money just to survive.

In other words, if your assets are physical and have value outside of "money", inflation or deflation is irrelevant. 

So I would rather own a $100k house outright, where I could raise a few chickens and potatoes and not need to worry about the mortgage payment on a $300k house just to have shelter or protect my equity.

Actually, that is the choice I made - but like they say: "Your milage may vary"

:^) 

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