A Mortgage Is for Paying Off

By Michelle Singletary
Thursday, August 30, 2007

African Americans are often the target of financial pitchmen trying to convince them they should never pay off their mortgages. Instead, the line goes, people should dig deeper into mortgage debt to purchase cars, fund their chosen lifestyles or invest.

The suggestion is that paying off your mortgage is akin to being a chump.

This is dangerous advice.

There was a time when people had mortgage-burning parties to celebrate the day they were released from their biggest debt. My grandmother, Big Mama, worked for the day she would no longer have to pay "the man" any money for her home.

Without mortgage debt, Big Mama lived comfortably in retirement for more than two decades. She didn't have a retirement nest egg of seven figures, either. Because she had gotten rid of the largest expense she had, Big Mama survived in retirement on a small pension, her savings and Social Security.

My concerns about people falling into a mortgage morass resurfaced at a recent presentation by Financial Independence Group, which I wrote about in an earlier column.

Toayoa Aldridge, a District resident who attended a different presentation by Financial Independence, was also concerned about the mortgage advice she heard at that meeting.

Aldridge was initially interested in refinancing a mortgage that Financial Independence said it could arrange until she realized she was being directed toward a five-year payment option ARM.

A payment-option ARM or pick-a-payment mortgage is an adjustable-rate mortgage that lets homeowners choose their payment options each month. One of the options is to make the typical payment of principal and interest. Homeowners can also choose to make an interest-only payment or send in a minimum payment, which can be less than the interest amount due that month. The minimum payment option results in "negative amortization." The unpaid interest is added to the mortgage balance. Some industry analysts estimate that 70 percent of payment-option ARM borrowers make only the minimum payments, the Consumer Federation of America found in a 2006 report on interest-only and option ARMs.

Many homeowners don't fully understand the terms and risk involved with making the minimum payment. They are so willing to believe that the way to prosperity is by signing up for these exotic loans and never paying off the principal on their mortgage. For the average homeowner, such advice is reckless. The recklessness is disguised in a market of rising home prices.

"The reality is real estate has peaks and valleys. I don't think that is the right sort of philosophy you should be touting for people who are not financially savvy," said Aldridge, who owns a home and several investment properties.

Home prices in the second quarter fell 3.2 percent compared with the same period in 2006, according to Standard & Poor's National U.S. Home Price Index, which tracks the value of single-family housing. Some cities saw steeper declines of almost 8 percent. Detroit's home prices fell 11 percent.

"A lot of people got used to home prices always going up," said Maureen Maitland, vice president of index analysis at Standard & Poor's. "Home prices do not go up forever, and we are going to have a little down trend for a while."

As many homeowners are finding out, the values of their homes have declined to a point where they are unable to get a price to cover the mortgage debt.

Foreclosure activity increased 9 percent in July, according to RealtyTrac, a real estate information firm. The foreclosure filings -- default notices, auction sale notices and bank repossessions -- were up 93 percent from July 2006. The report also shows a national rate of one foreclosure filing for every 693 households for the month.

Aldridge was looking for the loan for one of her investment properties. She said she had planned to pay more on the principal. Even so, she asked the Financial Independence representative what would happen after the five-year ARM was up. Aldridge said she was told she should worry about that when the time came.

A lawyer for Financial Independence declined to comment.

For many, that time is now. A lot of folks are losing their homes because they didn't have a backup plan for when their mortgage teaser rates would reset. The truth is, many could only afford the interest-only and minimum payment due on the interest-only and payment option ARMs.

You certainly don't want to end up house rich and cash poor, meaning all your money is locked into the equity in your home. Equity, I might add, that you can only tap by borrowing other people's money or by selling.

If you save, invest and eliminate your largest expense -- your mortgage -- you can live well in retirement as Big Mama did. Don't listen to the pitchmen and stay mired in mortgage debt. Yes, using other people's money can work for some in the best of times. But times change.

On the air: Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and online athttp://www.npr.org.She also has a new personal finance call-in show that airs Sundays on XM Satellite Radio, Channel 169 "The Power," at 8 to 10 p.m.

By mail: Readers can write to her at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.

By e-mail:singletarym@washpost.com.

Comments and questions are welcome, but because of the volume of mail, personal responses are not always possible. Please note that comments or questions may be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.

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