Real Estate Market

[dgies9156]

Which always makes me wonder why so many people do 30-year mortgages, and relatively few seem to do 15.  If most can pay off in less than 15 years, why not take the lower interest rate?

There's a couple of reasons why the 30 year fixed is still popular. The first is insurance. The 30 year fixed is a borrower's bet that interest rates will (eventually, I guess) go up. Think of it as a natural hedge against the impact of higher interest rates. Rates go up, my payment stays the same.

The second is spread. With a fairly narrow spread between the long and short end of the yield curve, there is no payment incentive on a long-term mortgage to shorten up and face the very real threat that sometime in the three-to-five year time frame, I'll have a sharply higher payment, whether I go short and refinance in a daisy chain or take a floating rate product. Right now, there is comparatively little incentive to go short.

Ironically, when we bought our current home in Chicago in the 1990s, the spreads between the short and long-term mortgage rates were significant enough that Mrs. Dgies and I financed with a one-year ARM. The day the loan closed, we made an appointment with the loan officer for 11 months hence to refinance the ARM before the rate changed. We closed the second-year ARM literally an hour after we got off a plane from France. We did this for three years (in an era when absolutely no cost mortgages were in vogue) until the 30 year fixed fell to a point where we locked in long-term. That locked-in long-termer was the loan we had until the home paid off.

[Coleman]

Because people don't actually pay it off in 9 years and continue to live in the house... They pay it off in a re-if or so they can buy a new house with a new mortgage.

Right.

I didn't interpret that statistic as most Americans actually paying off their house in 9 years.

The mortgage was just paid off through one of three options...actually paying it down (probably the least amount of the three options), a refi, or selling the home. In all instances the original mortgage would be paid off.

[GooooMarquette]

There's a couple of reasons why the 30 year fixed is still popular. The first is insurance. The 30 year fixed is a borrower's bet that interest rates will (eventually, I guess) go up. Think of it as a natural hedge against the impact of higher interest rates. Rates go up, my payment stays the same.

The second is spread. With a fairly narrow spread between the long and short end of the yield curve, there is no payment incentive on a long-term mortgage to shorten up and face the very real threat that sometime in the three-to-five year time frame, I'll have a sharply higher payment, whether I go short and refinance in a daisy chain or take a floating rate product. Right now, there is comparatively little incentive to go short.

Ironically, when we bought our current home in Chicago in the 1990s, the spreads between the short and long-term mortgage rates were significant enough that Mrs. Dgies and I financed with a one-year ARM. The day the loan closed, we made an appointment with the loan officer for 11 months hence to refinance the ARM before the rate changed. We closed the second-year ARM literally an hour after we got off a plane from France. We did this for three years (in an era when absolutely no cost mortgages were in vogue) until the 30 year fixed fell to a point where we locked in long-term. That locked-in long-termer was the loan we had until the home paid off.

I get the risks inherent in ARMs, but that wasn't what I was referring to.

I was talking 30-year fixed vs 15-year fixed.  According to Bankrate.com, the current 30-year fixed refi is at about 3.5%, while the current 15-year fixed refi is at about 3.0%.  If most people pay off their mortgages in 9 years anyway, they'd save money going the 15-year route.

I think Coleman hit it when he said the flexibility of having a lower mandatory payment was probably the key. 

[Benny B]

I get the risks inherent in ARMs, but that wasn't what I was referring to.

I was talking 30-year fixed vs 15-year fixed.  According to Bankrate.com, the current 30-year fixed refi is at about 3.5%, while the current 15-year fixed refi is at about 3.0%.  If most people pay off their mortgages in 9 years anyway, they'd save money going the 15-year route.

I think Coleman hit it when he said the flexibility of having a lower mandatory payment was probably the key.

To be clear, 9 years is the average pay-off time because that figure is heavily influenced by people who re-finance or buy a new home before their mortgage matures... very few people actually pay more than the minimum payment every month, no matter if they have a 15-year or a 30-year mortgage.  And even fewer actually live in the same place long enough to actually take their mortgage to maturity, again, whether 15 or 30 years, because of those who do make it to the final years before maturity typically pay it off at that point or they shift the mortgage into reverse.

[dgies9156]

I was talking 30-year fixed vs 15-year fixed.  According to Bankrate.com, the current 30-year fixed refi is at about 3.5%, while the current 15-year fixed refi is at about 3.0%.  If most people pay off their mortgages in 9 years anyway, they'd save money going the 15-year route.

I doubt it. 50 bps for a 15 year reduction in term is a hugely narrow spread just to buy a bigger monthly payment. Take out the 30 and make incremental principal payments, like my wife does. 50 bps on a Qualified Mortgage isn't going to matter.

She did that years ago, even when I was unemployed.

[Jay Bee]

Rent: Shocking the number of rentals in the Twin Cities metro. Just amazing.

Mortgage: Have actually been thinking about paying down my mortgage, even though it's a 3.75% 30-year. Principal less than 40% of the value (just bought a couple months ago)... so, I've already used a bunch of cash.. and I like the idea of a 30 year mortgage at 3.75% if rates jump significantly.. but,... then again, I don't know if 3.75% isn't a decent return for some of my investment portfolio. Have cash sitting on the sidelines... crazy to pay off a bit more? All of it?

Obviously the flexibility plays into it.. but, .. 3.75% saved vs. using that money to play the market or get barely anything in cash?

[MU82]

Rent: Shocking the number of rentals in the Twin Cities metro. Just amazing.

Mortgage: Have actually been thinking about paying down my mortgage, even though it's a 3.75% 30-year. Principal less than 40% of the value (just bought a couple months ago)... so, I've already used a bunch of cash.. and I like the idea of a 30 year mortgage at 3.75% if rates jump significantly.. but,... then again, I don't know if 3.75% isn't a decent return for some of my investment portfolio. Have cash sitting on the sidelines... crazy to pay off a bit more? All of it?

Obviously the flexibility plays into it.. but, .. 3.75% saved vs. using that money to play the market or get barely anything in cash?

At these rates, the best reason to pay down is a psychological one.

Do you want to own the home free and clear so you have no debt at all, not even mortgage debt? If so, that is the right answer for you.

We faced a similar decision and we LOVE not having a mortgage. I mentioned to my wife the possibility of refinancing and maybe using the cash to buy a vacation home, and she said something like: "We always wanted to be debt-free -- and now we are. Let's stay that way."

It's a peace of mind thing for us. For others, they'd rather have the mortgage and the cash flow. It's a very personal choice.

No "right" or "wrong" answer.

[GooooMarquette]

I doubt it. 50 bps for a 15 year reduction in term is a hugely narrow spread just to buy a bigger monthly payment. Take out the 30 and make incremental principal payments, like my wife does. 50 bps on a Qualified Mortgage isn't going to matter.

She did that years ago, even when I was unemployed.

What do you doubt?  15-year mortgages are made at lower interest rates.  And when an interest rate is lower, you pay less interest.  And roughly 0.5% is pretty significant when you're talking rates in the 3.0-3.5% rates.

We did the same thing your wife did, with incremental principal payments, but the interest was accruing more slowly.

[GooooMarquette]

At these rates, the best reason to pay down is a psychological one.

Do you want to own the home free and clear so you have no debt at all, not even mortgage debt? If so, that is the right answer for you.

We faced a similar decision and we LOVE not having a mortgage. I mentioned to my wife the possibility of refinancing and maybe using the cash to buy a vacation home, and she said something like: "We always wanted to be debt-free -- and now we are. Let's stay that way."

It's a peace of mind thing for us. For others, they'd rather have the mortgage and the cash flow. It's a very personal choice.

No "right" or "wrong" answer.

JB said he has cash siting on the sideline...so maybe it isn't a choice of being debt-free vs having cash flow.  Maybe he can have both.  We paid our mortgage off several years early, but never had to forego a single vacation, car or other purchase we otherwise wanted to make.

[Herman Cain]

Bought a second home on a barrier island along the Treasure Coast of Florida two years ago. Values were down at the time and Florida was in the dumps. Bought low.

Have no intention of selling but if I did, I'd have a nice intermediate term arbitrage profit. Florida is doing very well, especially in resort and retirement communities. The number of baby boomers retiring between now and 2027 almost assures the market will do well.

That and the further inland you go, the more likely it becomes that your neighbors are reptiles with very sharp teeth!

Nice investment.

[MU82]

JB said he has cash siting on the sideline...so maybe it isn't a choice of being debt-free vs having cash flow.  Maybe he can have both.  We paid our mortgage off several years early, but never had to forego a single vacation, car or other purchase we otherwise wanted to make.

Ditto.

And good point.

[Jay Bee]

JB said he has cash siting on the sideline...so maybe it isn't a choice of being debt-free vs having cash flow.  Maybe he can have both.  We paid our mortgage off several years early, but never had to forego a single vacation, car or other purchase we otherwise wanted to make.

Yes... I'm trying to exclude any thoughts about "no mortgage payment!" or "I'm debt free!" (because I think some* debt can be very healthy)... no feelings, more a question of asset allocation.

Do I keep the cash on hand and make ~nothing, but incur no investment losses? Do I put more into stocks, bonds, other? Or do I "take" the 3.75% via mortgage prepayment? 3.75% with no risk of loss doesn't sound awful to me. (Although if mortgage rates shoot up to 8.0% and I'm in the house for years, with no debt on it... then I'm irked.)