They can still take away your paid-off home. And a Mortgage update.

First the mortgage update:

Last month (April):

Balance: $128,172.50
Years left: 11.41666667
P = $701.53, I =$512.87, Escrow = 591.95

This month (May):

Balance: $126,271.80
Years left: 11.25
P = $707.05, I =$507.35, Escrow = 591.95

This prepayment includes quarterly dividends.  One month’s interest savings of $4.72.  Didn’t get grants with summer salary, so this is my second-to-last paycheck until October.  We should get a substantial tax refund soon.  What we’re doing for DC’s school next year is up in the air, so we may or may not need to pay a lump sum of a year’s tuition before August.

And now for the fascinating post on how they can take your paid-off home.

So one argument that people often make about prepaying your mortgage is that “they” can’t take your home away from you if it’s paid off.

Even ignoring say, imminent domain (for which you’re supposed to be compensated fairly), “they” can still take away a paid off home, even if it is a different “they.”  In fact, “they” may have an easier time taking away your home if you don’t have a mortgage from a big bank to protect you.

But you say, how can they take away my home?  I own it fair and square.

Not if you live in a home owners association.  In some states it is very easy for a home owners association to foreclose on you.  They can foreclose if you owe annual dues.  They can foreclose if your grass is too long or if your house is the wrong color.  And when they foreclose they don’t have to get fair market price for your house.

Here’s a sad sad story from NPR about one former homeowner’s experience.  Luckily the husband involved is a service member and there’s a law specifically protecting him, but it’s still a long drawn out court battle.  If he hadn’t been overseas serving our country he would have no protections at all.  If he’d had a mortgage company on his side, it is very unlikely that his $300+K house would have been sold on the steps of the capitol building for $3,500.  A mortgage company wouldn’t have allowed that.

Ok, sure, you can afford your annual HOA dues or you’ve wisely opted not to buy in a HOA.  But “they” can still get you if you run out of money.

That’s right, you can be foreclosed on if you don’t pay your property taxes.

Additionally, even if home owner’s insurance is not required, if you don’t have insurance, you can lose your home equity in a fire or other emergency.  My property taxes + home owners insurance is equal to a full third of my mortgage payment each month.  If I didn’t have the mortgage payment, that means I would still be paying half what is going towards principal and interest directly to the government and the insurance company.  That’s not chump change.  After the mortgage is paid off, the straight out housing expense does not go to zero.

Finally, it costs money to upkeep your house.  If you let things go too far it becomes dangerous to live in and can be condemned, even if you’re not in an HOA that will force you to keep it up.

So no, your housing expenses do not go away just because your house is paid off.  And you’re not 100% secure for shelter unless you have the money to pay the expenses that go along with homeownership, including taxes, HOA dues, and upkeep.  Paying off your house does not provide infinite security.  It’s not a magic bullet.  Your housing expenses are lower but they do not just disappear.

Still, we’re doing some mortgage prepayment.  It is a form of diversification, into a safe asset rather than our retirement accounts and the stock market.  At 4.75% interest (not counting the deduction) it’s still a better use of our extra “safe” money than CDs or termshares.  Plus it adds some real estate into our portfolio, though admittedly not a very diversified kind of real estate.  Whether or not we’ll go back to making large pre-payments come fall when we get paid again is something we will have to think about in the future.

38 Responses to “They can still take away your paid-off home. And a Mortgage update.”

  1. Comrade PhysioProf Says:

    It is a form of diversification, into a safe asset rather than our retirement accounts and the stock market.

    I’m no financial genius, but it’s obvious even to me that considering investment in a piece of real estate to be a “safe asset” compared to, e.g., an S&P index fund is absolutely ridiculous. Have you noticed how far the real estate market has fallen in the last four years? And what if circumstances make you want to move? Could you even sell your house?

    • nicoleandmaggie Says:

      It is a safe asset in that, even if the value of the house goes to zero, I will still owe money on it. Paying off the debt is a safe investment. Buying real estate is not a safe investment. Paying off debts for real estate that has been already purchased is.

      Sure I can foreclose (or short sell, though probably not in my current housing market), but I’m not likely to do that. Much more likely to just take the loss.

  2. Molly On Money Says:

    I had no idea about the HOA’s power- it kinda makes sense. HOA’s want as much control of keeping property values high. That’s why many people like them.
    Last year I looked closely at paying our mortgage off aggressively. I was surprised how much I would continue to pay for insurance and property taxes (they are wrapped up in the monthly mortgage payment). Initially in my mind, if I paid of my house I’d be free and clear- not so!

    • nicoleandmaggie Says:

      I know! A full third of our mortgage payment is escrow. We could actually rent a small apartment for what we pay in escrow…

      • Comrade PhysioProf Says:

        I never heard of this mortgage escrow thing before. I’ll have to ask PhysioWife if thatte’s how we pay our taxes and shitte.

      • nicoleandmaggie Says:

        It’s sometimes optional. Like you still have to pay your taxes, but the mortgage servicer doesn’t always have to take monthly payments from you and you can do it in one lump each year. Sometimes home owners insurance is optional, and sometimes it isn’t.

      • Comrade PhysioProf Says:

        I think we have some kind of homeowner insurance.

      • m @ random musings Says:

        One thing I dont like about escrow is that they make you prepay a reserve (1yr for my mort co), which doubled the closing costs. grrr!

        I’ve also run into the situation of a clerical error when the mort co paid the property taxes – they used the monies from our escrow acct to pay taxes for another property (same house number and county, different street/city). It was a huge mess getting it sorted out – the mort co refused to pay *our* taxes until the county reversed the payment, the county didn’t want to reverse payment ’cause the freeloading prop was already delinquent. Major pita.

      • nicoleandmaggie Says:

        ugh, what a nightmare!

  3. Comrade PhysioProf Says:

    I just found out we pay our property taxes directly to the state, four times per year.

  4. Executioner Says:

    Interesting post. You are absolutely right: unless you have a benefactor (sugar daddy/mama) who will provide shelter for free, or unless you are willing to live in an igloo in the wastes of Antarctica (with only penguins for companions), there is no “magic bullet” which will provide infinite housing security. To me, you have one of three options:

    A. Pay rent. Your rent will cover the landlord’s costs, which include the underlying mortgage, taxes, insurance, upkeep, etc. You will not gain any tangible asset in this scenario.

    B. Buy a home and pay your mortgage off slowly (on time). You will be responsible for your own taxes, insurance, upkeep, HOA dues, and so on. You will avoid paying rent in this way, but you will pay interest to the lender. At the end of the mortgage term, you will have an asset (the house).

    C. Buy a home and pay off the mortgage quickly (ahead of schedule). After the loan is gone, you will be responsible for your own taxes, insurance, upkeep, HOA dues, etc. In this scenario, you do not pay rent. After the mortgage is paid off, you have an asset (the house). You also pay far less interest than in scenario B.

    Regardless of which scenario you choose, you will ALWAYS pay taxes, insurance, and upkeep — either indirectly (choice A) or directly (choices B & C). And in any scenario, if you aren’t current on your bills (rent, taxes, etc), you can lose your home — so be responsible and pay your bills on time. Still, for my money, choice C is best, since the overall cost of ownership over time is lower than scenario B (less interest), and it offers a tangible asset at the end (unlike scenario A).

    • nicoleandmaggie Says:

      You could always go for D. Buy a home with cash!

    • Gary Dorame Says:

      Wake up Americans. It’s the politicians and the governments that make up all the rules. We, the people, need to get things changed. I understand HOA rules, but they should not have the power to take your house without paying fair market prices. Same thing with any other institution. If they have the power to take you paid off house, \they should have to pay fair market prices. “THEY” have been stealing from us for far too long. Start voting out all the bums that only want your money……no matter what the consequences.

  5. hush Says:

    Debbie Downer here, chiming in to say Amen to the scary suckiness of HOA authority, and agreeing that for many folks paying down a primary mortgage is a wise course of action. Our homes could also easily get “taken” in the sense that all or part of it gets destroyed by some natural disaster, and we suddenly find out we’re underinsured, and/or our insurance company denies our claim…

  6. eemusings Says:

    Ugh, another strike against housing complexes.

    Luckily, they’re still quite rare here – the kiwi half-acre dream won’t die easily.

  7. First Gen American Says:

    I still think that having lower fixed expenses is a good thing. It even gives you a lot more flexibility if/when it comes time to sell said property. If you have a lot of equity, you can drop your price to sell a place fast vs having to write a check for money you may not have at closing.

    I have definitely used home equity as a way to diversify my savings portfolio. After 2008 crash, I realized how vulnerable I was having so much money tied up in stocks.

  8. Squirrelers Says:

    You never really, truly ever own your home. In the grand scheme of things, we’re all renters in a sense. If you don’t pay real estate taxes, this concept comes into play.

  9. Debbie M Says:

    My taxes and insurance were 17% of my total monthly payment when I started; now (12 years later) they are 43%. That’s mostly due to the value of my house going up; and it’s in spite of refinancing from a 30- to a 15-year mortgage.

    I knew about the tax collector being able to take back your property (from reading about the Great Depression), but not HOAs.

    Compared to renting, buying a house removes one more power figure (the landlord), and paying off the house removes another (the banker). (Most rentals have both bankers and landlords, though if the bank forecloses on the property–or if the owner sells to another owner–your lease still has to be honored–at least where I live.)

    • nicoleandmaggie Says:

      Yeah, different states have different laws on whose rights take precedence in those kinds of situations.

      While it is true that paying off your mortgage removes a power figure, it’s also the case that it removes a layer of protection– the bank WILL fight a HOA (and will most likely win) if it is the bank’s mortgage on the line.

      • Debbie M Says:

        I despise HOAs. If somehow my house ends up in one (I suspect the residents can vote one into existence if they are in the majority), I will sell ASAP. So, I won’t need a bank to help me.

        I’m not really a big fan of the bank who bought my mortgage, so depriving them of some expected interest makes me happy.

      • nicoleandmaggie Says:

        For us it was a choice between 1. HOA, 2. Students, 3. Snakes .
        We figured the HOA was the lesser of the 3 evils, though sometimes I wonder.

      • Debbie M Says:

        Yep, that’s what I’ve heard around here, that the “best neighborhoods” all have HOAs. When I was house-hunting, I couldn’t afford the best neighborhoods, so that wasn’t a problem. Also, I’m not having kids, so I don’t have to worry about the best schools. Of your choices, I’d pick students, but then I’m not a faculty member (who really needs to not make it easy for students to know whose house to egg). In your situation, I think I’d rent. Aren’t you in a small town you’re not that wild about? Yeah, rent.

        What kind of snakes? Are any of them poisonous? If so, how poisonous, and is there a hospital nearby that has the antivenom? Maybe I’d pick the snakes.

      • nicoleandmaggie Says:

        Snakes + birds of prey that literally eat cats, to be complete.

      • Debbie M Says:

        Ah, cat-eating snakes and birds. Indoor cats? And trying very hard not to look at all cat-like? Well, I wish you continued good luck with your HOA.

      • nicoleandmaggie Says:

        I don’t think the snakes eat cats. They’re just big and poisonous. We do have indoor cats, but so did our colleague… back when she still had cats. *sob*

      • Debbie M Says:

        Yikes.

  10. Grace Says:

    HOA’s have always creeped me out. Not only do they have a racist, elitist history, but do I really want any organization telling me I cannot hang laundry outdoors, nor can I park my RV (assuming I had one) in my driveway?

    I think sometimes about selling my 1929 three-floored home for a condo downtown–but then I run into the same problems–other folks who do NOT or did NOT pay the mortgage, telling me how I have to manage my own home.

  11. Lindy Mint Says:

    I read a story a few years ago about an elderly woman who hadn’t cleaned up her property (possibly didn’t pay her dues either, I can’t remember), and the HOA evicted her.

    I remember thinking, what happened to helping the widow on the block clean up her yard? Most likely she can’t do it and can’t afford to hire someone. Instead they just kick her out of her home. I like living in a neighborhood with an HOA, but I don’t like how it can replace human decency and logic at times.

    • nicoleandmaggie Says:

      No. Why do they send vague certified letters threatening to sue when a simple phone call saying, “Hey, when we said flowerbeds we actually meant your wilderness area, boy that would have saved you several hundred dollars in landscaping if you’d actually known what we were talking about,” would be so much more neighborly and efficient? Sorry, projecting.

      That poor lady.

  12. Carnival of Personal Finance Mother's Day Edition Says:

    […] from Nicole and Maggie: Grumpy Rumblings presents They can still take your paid off home (and a mortgage update), and says, “Nicole and Maggie discuss how you can lose your home even if it is completely […]

  13. Jack Says:

    Buy a small sailing yacht and keep it at anchor. No taxes noone taking it away if I don’t maintain it and if I don’t like my neighbor or scenery I just sail off to somewhere else. And I don’t pay rent .been living like ths for 10 years ad life is good.

  14. Jack Says:

    Buying a home in the u.s. is a rip off. Better off renting and living within your means. Look at the athletes that walk away from huge castles they bragged they owned, 50 million dolor homes , you would think they would pay that off in a year or two since they bring in over 100 million a year but no , ten years not it they are broke, and owe 80% of what their supposed castle is worth and have to walk away from them!
    The reality of the matter is. You do NOT own your home if you haven’t paid for it in full , the bank or lending agency does. All you did was put down a small percentage . Now for those that do pay cash in one instance ad own their home right out how is it that if you fall on hard time a few years down the line someone else can make you loose your home?? Something is wrong. What if you buy lad and build your own home on it.. Can they still come and ask you to leave because you painted it pink? If so then something is wrong in the land of the “free”
    Just rent a home and own a yacht that you can sail your family off with to wherever you want on earth.


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