Refinance 30 year mortgage to 15 - Advice wanted

[Hard Five]

It feels weird to ask the following question to people I don't know, but this site is full of educated, financially smart/secure individuals, so here it goes.

We are currently in an FHA 30 year mortgage at 5% that originated in late 09. I haven't refinanced to date as the changes in PMI insurance effectively eat away the profits I'd see monthly (ie payment theoretically goes down 150, but PMI payment goes up 150). I almost pulled the trigger on a 15 year loan in 2011 for 3.25%, but decided it wasn't the right time to increase monthly payments with a 1.5 year old and another on the way.

Fast forward to now. Box loans has a no out of pocket cost 15 year FHA refinance at 2.75%. Our Monthly payment would go up 400ish, which we can afford. My wife and I are smart with our monthly finances (almost no debt other then our home and a 15k student loan), and we make low 6 figures in stable jobs, but we're not investment savvy.
- We both have a 401K and I contribute to a pension plan, but don't have any other investments.
- Our total monthly bills/costs are about 70% of our Net income.
- We've never changed our tax withholding's so we receive a sizable tax return each year (7-10K) in addition to what we save throughout the year. This was a great debt reduction tool for us to eliminate our accrued debt after college, but has become a tool to build our rainy day fund. We will transition this $ to 401k/college savings plans so it is earmarked.

I view the mortgage as a very safe long term investment. Between the 15 and our current 30 year, the interest savings is 150K. If all goes according to plan, My home would be paid in full when I'm 44 and my oldest daughter is just about ready to start college. I don't see us ever moving as the downturn in the market allowed us to buy a home in one of the best neighborhoods.

I know some people say get the 30 year loan but pay like it's a 15. This won't work for us as refinancing into a new 30 year makes no sense given the above mentioned change in PMI. On a new 30 year loan, I'd be paying about 2K more per year in PMI which is a terrible waste of money for the next 8 years (assuming home values remain flat). Additionally, I can't overpay on my current loan (5%) because even if I pay an extra 400 every month, my total interest paid will be 70K over the 15 year refinance (and that factors in the interest I've already paid on my 30 year).

Is there any reason not to get the 15 year loan? In my shoes would you use the money elsewhere? We're good at reducing/strategizing our monthly expenditures, but we're just not finance/investment educated, for lack of a better term. I find that professionals can usually sell you on why their path is best, so I'm just looking for opinions from folks that aren't going to lose/gain anything based on our decision.

Your time reading this, and any advice you may wish to share, is most appreciated.

 

[heySkippy]

I listened to all the arguments 10 years ago and went for it and refinanced for 15. Now, with the help of an extra couple hundred bucks towards principal on most payments, we have less than 3 years until it's done.

It might or might not have made the most financial sense, but it was definitely the right thing for us. We're planning to stay in this house pretty much forever and the piece of mind knowing I could easily keep my home with much less income, if necessary, is great.

And another thing, when we make that last payment, it's going to be like getting about a 15% pay increase (after taxes!) and I'm going to have a lot of fun spending that!

 

[EAC]

We just bought a house and close on May 23rd. For us, we saw no gain in financing @ 15 years compared to 30 years since interest rates are so low right now (I can't see them going much lower).

We did however want to eliminate that stupid PMI. The only way to do this was to go with a conventional loan @ 20% down. With that, we got loan commitment @ 3.5%.

 

[blue_myriddn]

I refinanced from a 30yr to a 15yr a few years ago and have zero regrets. When I was doing the analysis, I put together a spreadsheet with the following variables:

monthly payment on 15yr loan
monthly payment on 30yr loan
X = # years I lived in the home

Then I played around with different values of X to see where I would stand at different points of home ownership. For me, the math greatly favored a 15yr given our location. I believe the only thing that would hurt the math is if you were in an area where you would expect serious home devaluation in which case the more $$ that you have put in to the home is more $$ that will be losing value.

 

[itrsteve]

I'd take the dive if you know the difference isn't going to be that much of a hit. Look at the amortization tables and look at what your principle payments turn into.

My house is being rented out right now and I'm chomping at the bit to move back in so I can do a 15 year refi while these rates are ridiculous.

 

[sahtt]

Do the 15. I've helped several family members save 6 figures in interest doing this lately.

 

[Hard Five]

I listened to all the arguments 10 years ago and went for it and refinanced for 15. Now, with the help of an extra couple hundred bucks towards principal on most payments, we have less than 3 years until it's done.

It might or might not have made the most financial sense, but it was definitely the right thing for us. We're planning to stay in this house pretty much forever and the piece of mind knowing I could easily keep my home with much less income, if necessary, is great.

And another thing, when we make that last payment, it's going to be like getting about a 15% pay increase (after taxes!) and I'm going to have a lot of fun spending that!

My thoughts are very similar. I won't get a raise per se as my girls will be entering college, but any assistance I can give them the better.

We just bought a house and close on May 23rd. For us, we saw no gain in financing @ 15 years compared to 30 years since interest rates are so low right now (I can't see them going much lower).

We did however want to eliminate that stupid PMI. The only way to do this was to go with a conventional loan @ 20% down. With that, we got loan commitment @ 3.5%.

May 23, my birthday, congrats.

I would love to go conventional, but we don't have 60K to put down. We were 2 years out of college when we bought the house and didn't want to miss out on downturn in the market. In hindsight we should have waited but we didn't know the market would stay down for so long. PMI on a 15 year loan is 160/month, which will drop off at 20% equity (in 4-5 years). Much easier to justify spending 8k on PMI then dropping 60K (our savings then some) as a down payment.

I refinanced from a 30yr to a 15yr a few years ago and have zero regrets. When I was doing the analysis, I put together a spreadsheet with the following variables:

monthly payment on 15yr loan
monthly payment on 30yr loan
X = # years I lived in the home

Then I played around with different values of X to see where I would stand at different points of home ownership. For me, the math greatly favored a 15yr given our location. I believe the only thing that would hurt the math is if you were in an area where you would expect serious home devaluation in which case the more $$ that you have put in to the home is more $$ that will be losing value.

I have done this as well, and I looked at costs (comparing multiple loans) at 1, 5, 10, and 15 years. This 15 year loan seems to be the winner, but I have this fear (maybe unreasonable) that I will do the refinance, then some investor will tell me if I'd parked my additional funds in x, I'd have made more money over the same span.

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I'd take the dive if you know the difference isn't going to be that much of a hit. Look at the amortization tables and look at what your principle payments turn into.

My house is being rented out right now and I'm chomping at the bit to move back in so I can do a 15 year refi while these rates are ridiculous.

It's pretty amazing. Total intrest on 15 year loan is only 62K. Wonder how much lower (if any) rates can go.

- - - Updated - - -

Do the 15. I've helped several family members save 6 figures in interest doing this lately.

I've read a number of your posts and you are obviously know your stuff. Good to know you agree.

Thank you to everyone for so many quick responses. As I said before, it's appreciated.

 

[itrsteve]

Question 2, are you able to get this without a ton of closing costs? I'm really curious if BOA will let me just refi my loan in place without any bs (closing costs, appraisals, etc). That's homework I'll have to do on my own.

Any savvy investor will tell you that with how low interest rates are it's silly not to take that extra money and invest elsewhere. However, there's a degree of discipline (that I know I lack) and the thought of having a paid off house in my early 40's seems amazing (sounds like you're in the same age range).

 

[Hard Five]

Here is the loan breakdown
Processing fee - 199
Lender credit - (1,956.90 to me)
Appraisal 560
Credit report 33
Title 1165.00
-----------
total - 0 out of pocket

This doesent include upfront mortgage insurance which can be paid, or financed into the loan. I wont know this until I actually pull the trigger which I haven't done yet. All FHA loans require this so its kinda the cost of doing the loan. Since I paid this in my loan just a few years ago, I think I get a partial refund of that, but I'm not sure.

Partial month interest, Homeowners, and property tax are a wash as I already pay them. Maybe I pay something upfront, but should get those items refunded from my current escrow.

 

[docjohn]

The biggest factor to refi is that you intend to live in the house.You did'nt have much skin in the game to start, but you are way ahead of most folks from what you have posted.Being able to save 30% of net income is amazing.At 5% you are a great customer of the current bank but thats not going to help you save money in the long run.So as the other have said do it.

 

[drtruong]

15yr .... YOu would pay less interest over the yrs. but the monthly home mortgage will be much higher.
30 yr..... If you look the graph on the mortgage calculator, the interest will double the principle by the time it is all paid off. And of course monthly would be cheaper.

Others would say that they use the money to invest in something else, but what will you invest in? Stocks ( too risky ), CD (it is a joke). I think it is the time to invest in the housing market again.

So it depends on your financial situation. I would go for 15 yrs and it will build up your equity. We bought our house
2 yrs ago and we paid cash for it . It was a good deal that we could not resist and in process to re finance the former house to 15 yrs. and we are renting it out.

 

[pvmike]

Sounds like you just missed the June '09 cutoff to do a streamline FHA with no MI increase.

You also just missed another crucial cutoff date: April 1, 2013 (so make sure you're getting an accurate quote!). For loans registered prior to that date, you would be grandfathered in for the previous MI schedule:

15-year loan terms with loan-to-value over 90% : 0.60 percent annual PMI
15-year loan terms with loan-t0-value under 90% : 0.35 percent annual PMI
30-year loan terms with loan-to-value over 95% : 1.25 percent annual PMI
30-year loan terms with loan-to-value under 95% : 1.20 percent annual PMI

Each of these is now up 10 basis points, or .10%.

Here's another crucial date: June 3, 2013. Right now, you can remove MI when you get to 78% LTV (5 years minimum except for 15 year loans). After June 3rd, MI payments will be permanent if you started at over 90% LTV, 11 years minimum if you started at under 90% LTV. Ridiculousness!

Did you start with a 3.5% down FHA loan in '09? My guess is that your original loan balance was around $400k at 5%, and now you're pondering a $375k 15 year loan at 2.75% (since you've paid down about 6% of your loan in the last 4 years). Mortgage insurance is almost a wash because PMI rates for a 30 year in '09 were .50-.55%, and now you're looking at a 15 year at .70% (and not .60%!).

MIP was 1.25-2.25% in 2009, so if you put 3.5% down when you purchased your home, you started with 1.25-2.25% equity. So now, not counting appreciation, you would have about 7.25-8.25% equity in the home (unless of course you put more down to start with).

So here's my advice: Regardless of whether you go with a 30 or 15 year loan, opt for a conventional loan instead! You will pay less in mortgage insurance, even if your loan is between 90-95% LTV (i.e. ~.57% for a 15 year, ~.64% for a 30 year). And even less than that if your home has appreciated a little bit and your loan is <=90%.

But note that a conventional loan will have a DTI limit of 45% (while it's 55-57% for an FHA loan). Sounds like you're W-2, so calculate your total DTI using your gross, not net income.

Good luck!

 

[sahtt]

Question 2, are you able to get this without a ton of closing costs? I'm really curious if BOA will let me just refi my loan in place without any bs (closing costs, appraisals, etc). That's homework I'll have to do on my own.

Any savvy investor will tell you that with how low interest rates are it's silly not to take that extra money and invest elsewhere. However, there's a degree of discipline (that I know I lack) and the thought of having a paid off house in my early 40's seems amazing (sounds like you're in the same age range).

Many but not all will recommend that. Risk is difficult to ascertain but we know investment returns are uncertain and the "risk free" yields are still below what your new mortgage rate will be, especially after deducting mortgage interest. Even if you go fixed income it is the same situation, arguably worse, despite what people believe. Interest rate risk is huge right now in the fixed income market (always important, now extremely so). Nobody knows if a "guaranteed 3%" yield is better or worse than the equivalent to a 5% yield with a standard deviation of 5%, which probably isn't too far off the mark if you assume the market fits a bell curve.

 

[Hard Five]

The biggest factor to refi is that you intend to live in the house.You did'nt have much skin in the game to start, but you are way ahead of most folks from what you have posted.Being able to save 30% of net income is amazing.At 5% you are a great customer of the current bank but thats not going to help you save money in the long run.So as the other have said do it.

We don't always save 30%, but we are quite lucky to be where we are. Honestly don't see us moving, and that has been a big determining factor for us thinking about a 15 year.

15yr .... YOu would pay less interest over the yrs. but the monthly home mortgage will be much higher.
30 yr..... If you look the graph on the mortgage calculator, the interest will double the principle by the time it is all paid off. And of course monthly would be cheaper.

Others would say that they use the money to invest in something else, but what will you invest in? Stocks ( too risky ), CD (it is a joke). I think it is the time to invest in the housing market again.

So it depends on your financial situation. I would go for 15 yrs and it will build up your equity. We bought our house
2 yrs ago and we paid cash for it . It was a good deal that we could not resist and in process to re finance the former house to 15 yrs. and we are renting it out.

The investment part is the question. I can see the rate of return on simple investments is super low, but the question that worries me is what don't I know. I'm smart enough to know there is a ton I don't understand, especially when it comes to investing. The "financial planner" that I met with through my employer just wanted to sell me his services (over the 15 year loan). Maybe he is that good, but he obviously benefits by telling me he can do better.

Sounds like you just missed the June '09 cutoff to do a streamline FHA with no MI increase.

You also just missed another crucial cutoff date: April 1, 2013 (so make sure you're getting an accurate quote!). For loans registered prior to that date, you would be grandfathered in for the previous MI schedule:

15-year loan terms with loan-to-value over 90% : 0.60 percent annual PMI
15-year loan terms with loan-t0-value under 90% : 0.35 percent annual PMI
30-year loan terms with loan-to-value over 95% : 1.25 percent annual PMI
30-year loan terms with loan-to-value under 95% : 1.20 percent annual PMI

Each of these is now up 10 basis points, or .10%.

Here's another crucial date: June 3, 2013. Right now, you can remove MI when you get to 78% LTV (5 years minimum except for 15 year loans). After June 3rd, MI payments will be permanent if you started at over 90% LTV, 11 years minimum if you started at under 90% LTV. Ridiculousness!

Did you start with a 3.5% down FHA loan in '09? My guess is that your original loan balance was around $400k at 5%, and now you're pondering a $375k 15 year loan at 2.75% (since you've paid down about 6% of your loan in the last 4 years). Mortgage insurance is almost a wash because PMI rates for a 30 year in '09 were .50-.55%, and now you're looking at a 15 year at .70% (and not .60%!).

MIP was 1.25-2.25% in 2009, so if you put 3.5% down when you purchased your home, you started with 1.25-2.25% equity. So now, not counting appreciation, you would have about 7.25-8.25% equity in the home (unless of course you put more down to start with).

So here's my advice: Regardless of whether you go with a 30 or 15 year loan, opt for a conventional loan instead! You will pay less in mortgage insurance, even if your loan is between 90-95% LTV (i.e. ~.57% for a 15 year, ~.64% for a 30 year). And even less than that if your home has appreciated a little bit and your loan is <=90%.

But note that a conventional loan will have a DTI limit of 45% (while it's 55-57% for an FHA loan). Sounds like you're W-2, so calculate your total DTI using your gross, not net income.

Good luck!

Lots of specific info here, thanks.
1. Loan info was procured this morning.
2. we started with 3.5 down FHA, 1st payment 11/09 (wish we had met the 6/09 cut off)
3. Our loan was 310K, now owe 290K. House is worth 330K-ish.
4. From your description it sounds like we will pay less if our LTV is under 90%. We have done a lot of upgrades since we bought the house - 1700+ sq ft hardwood floors, premium appliances, extensive landscaping. Whats the best tool, outside of an appraisal, to gauge your homes vale? Zillow says 327k but their range goes from 290-370. Based on homes for sale in the neighborhood its worth at least 315 (based on sq. foot, lot size, quality). Their is only 1 house for sale currently to compare to, which based on dollar per sq. foot, would place our house at 465K (I wish).
5. Our DTI using gross is under 1/3.

Is the big difference between FHA and conventional just the 3.5 vs 5% equity?

Many but not all will recommend that. Risk is difficult to ascertain but we know investment returns are uncertain and the "risk free" yields are still below what your new mortgage rate will be, especially after deducting mortgage interest. Even if you go fixed income it is the same situation, arguably worse, despite what people believe. Interest rate risk is huge right now in the fixed income market (always important, now extremely so). Nobody knows if a "guaranteed 3%" yield is better or worse than the equivalent to a 5% yield with a standard deviation of 5%, which probably isn't too far off the mark if you assume the market fits a bell curve.

This is both why I asked this question, and the anwser I fear. I understand std. deviation and bell curve from statistics but the rest is just word recognition; the meaning is lost on me. I believe your saying the rate of return on interest savings (from the 15) is better than the other low risk options available at the moment, so I should do the 15.

- - - Updated - - -

Based on the responses so far (Thank you) I think we're gonna go for the 15, and based on pvmike's info, we'll go with the 15 conventional as it does not require upfront Mortgage insurance like the FHA loan does.

Which would you do

2.625 - Total out of pocket cost 2,961 - Monthly payment (PI + PMI) - 2,083.48
2.750 - Total out of pocket cost 1,501 - Monthly payment (PI + PMI) - 2,100.81
2.875 - Total out of pocket cost 0 - Monthly payment (PI + PMI) - 2,153.33

In comparison to the no cost 2.875 loan...
Break even on the 2.750 is 2.5 years.
Break even on the 2.625 is 3.5 years.

Seems logical to do the 2.625 since we have no plans to leave. Thoughts?

pvmike said the next big cut off for PMI is 6/3/13 - Does that mean the loan must close by 6/3/13 or just locked in by then?

 

[pvmike]

My loan amount guestimate was based on your stated $400 increase going from a FHA 30 to an FHA 15. Going from a $310k 30 year loan at 5% to a $290k 15 year at 2.75% is only increasing your P&I payment by about $300, and your MI would only increase by about $20 per month. Check your numbers.

Comps: Zillow ain't bad, but sometimes they're way off. Look at recent sales within the past 3 mo's and within 1/2 mile. Comps should be within 20% of the size of your home. Increase time and distance if necessary. Obviously it's ultimately up to the appraiser to give his opinion of value.

6/3/13: Remember, this date is for an FHA loan only. It must be registered by that date, i.e. assigned an FHA case number.

Difference between FHA and conventional: There are actually 3% down conventional loans. FHA mortgage insurance is higher, and FHA also requires up front mortgage insurance. You would opt for an FHA loan for a variety of reasons, such as: you have low credit, high DTI, want to use rental income from your old house when you're buying a new house but don't have 2 years of documented landlord experience, etc.


Anyways, you're on the right track now going with a conventional loan.

 

[Vega$ NSX]

I've had multiple discussions on mortgages and investing and it's something I've followed closely. I hope you can trust me in that I've looked at this type of situation every which way you can. But basically it boils down to this. There is no right answer because you can't predict the future. You don't know what the markets are going to do so it's impossible to know what the right answer is. What will the rate of return be for the stock market be in the next 15 years? What's the housing market going to be in 15 years? What will inflation be like in 15 years? Will the US even be solvent in 15 years? Nobody knows and the correct answer lies within.

It ultimately boils down to a comfort level and what form do you want your money. Essentially, it breaks down like this. If you go with a 15 year loan you will have a lower interest rate, but a higher monthly payment. That means, at the end of 15 years, you will have less cash on hand but you will paid off your house. At the end of 30 years, you will have caught up and have more overall money because you paid less total interest. So the question is, are you willing to trade more cash on hand for 15 years in exchange for more overall money at the end of the 30 years. Basically, would you rather have a bird in the hand (30 year fixed) or two in the bush (15 year fixed). Now I say "cash in hand" but the reality is "cash in hand" really means "opportunity". What you do with that money is what defines the value of that cash in hand. If you do nothing with that cash, then clearly it makes more sense to go with the 15 year fixed. However, if you feel like you can invest that money and make more money than the differential in interest rates, then it makes more sense to do the 30 year fixed. Again, since nobody has a crystal ball, it's hard to really say if you can or not. Or perhaps, it's not just chasing money. Maybe you value the security. Knowing you have a safety net in case you get sick or lose your job, perhaps it's that peace of mind that is worth having the cash. Sometimes you can't put an actual dollar value to that, but for some people it's invaluable. For me, I can't tell you the freedom I feel in having enough liquid cash that if I had to quit my job for whatever reasons, I could. If I had tied up all my money in a non-liquid house, I think my work would stress me out more than it already does. I've also talked about some of the huge benefits of having a large lump sum of cash for opportunity investments. It's in a thread somewhere out there if you do a search. The bottom line is:

1) You won't be able to predict which will net you more money in the end because you can't predict the markets or guarantee a rate of return.
2) Some of the value of one option may have more value than the other, although actual dollars don't factor in. You may prefer the security of owning your home sooner, versus the security of having more liquid cash.

Having said all that, ultimately, instead of worry about squeezing every percentage out of maximizing your dollars, just realize that you are way ahead of the curve than most people and the fact that you are in the position to own a home and have a comfortable savings, a comfortable life, with a nice family... THAT is what's really going to make you wealthy in life (not the extra 0.6% rate of return you got on your money). So you may leave a few dollars or percentage points on the table, the point is, either way you'll end up in a good position. You are in a winning position regardless which path you take. The fact that you are making a good living and are already responsible with your money is the more important factor here. It's like saying do you want to do really well or really, really well? Just pull the trigger and make a decision one way or another knowing either way you'll do just fine, move forward and don't look back, and use all the time you'll save no longer mulling it over with your current and soon to be kids and wife. Then you'll realize the greatest rate of return. :smile:

 

[racer9x]

What he ^^^^^^^^^^ said:smile:.

 

[jond]

The last time I made this decision, I picked 30 years, and then just doubled up(or more) on every payment.
My logic was should I lose my job, blow the engine in my car, etc, etc, I would rather have the lower payment obligation.
Takes discipline though. If both parties don't have the discipline, I would opt for 15.

 

[docjohn]

In this case the decision is more clear cut because he is comparing a 30 year at 5% vs a 15 at less than 3.I think it would be a different more involved discussion if we were comparing the two loans at similar rates.

 

[PHOEN$X]

I'm normally pretty debt averse, but due to the recent low interest rate environment, a mortgage is probably the cheapest money you're ever going to be able to borrow. I am definitely taking advantage of it.

Why a Long-Term, Fixed-Rate Home Loan Makes Sense

I had a paid off house before, and yeah it was cool for a little while but it wasn't all that it cracked up to be. I ended up ratcheting my frivolous spending just because I could, plus I lost my motivation to go to work. So I bought a new house and took out a mortgage, and I'm more content now. Of course, knowing that I could cash out my retirement and pay off my house if I need to is a comforting feeling, and lets me sleep at night.

I think the OP will do just fine either way, as he seems to possess the necessary knowledge and discipline to succeed financially.

 

[Big_D]

I am doing a zero cost Refinance to 15 years myself at 3.0%. I was looking at 2.75% with origination fees and such but decided .25% wasn't really going to make a big difference in my payment.
I'm getting about $1600 back after closing and the taxes and insurance impounds are already figured in. Plus I will get a refund of the impounds from my other loan and skip the May payment.
After all is said and done I got almost $5k to refinance my home. Not Bad!

My advice is to lock in a good rate and don't look back!

 

[Hard Five]

Rates on 15 are lowest ever.

The 15 year @ 2.625 for 2961 out of pocket (total) that I reference above is now 1974 out of pocket (all details ie APR, monthly payment etc. are the same). Just an FYI for anyone on the fence.

Thank you again to everyone who chimed in. Definitely going for the 15.

 

[steveny]

With a great number of individuals picking a 15 year note over a 30 and that not being the case throughout history it will be interesting to see how this affects the economy/spending habits of people 15 years out when they are not saddled with a mortgage payment. There will be more disposable income than ever before throughout history and that money will be in the hands of financially prudent people. Hard to say which way it will go but if I had to guess I'd say it'll be a boost to the economy and the stock market.

 

[sahtt]

With a great number of individuals picking a 15 year note over a 30 and that not being the case throughout history it will be interesting to see how this affects the economy/spending habits of people 15 years out when they are not saddled with a mortgage payment. There will be more disposable income than ever before throughout history and that money will be in the hands of financially prudent people. Hard to say which way it will go but if I had to guess I'd say it'll be a boost to the economy and the stock market.

I concur - overall balance sheets for a substantial sector of our middle/upper class will be impacted in a huge way by no mortgage in 10-15 years. People always compare a shorter mortgage with investing in another asset but unfortunately I didn't ride a unicorn to work on a platinum rainbow this morning (sounds fun though doesn't it?).

In the real world, people piss away the vast majority of their desposible income on things that are worth 0-5% of their original price within a few years. The dumb cars we all cycle through on a regular basis are great investments compared to what people spend most of their money on (vacations, latest and greatest tech gear, fancy dinners, fancy hair cuts, $100+/m phone AND cable bills, etc.).

The combination of consumers piling money into their house instead of their boat plus paying a very small (reasonable IMO) interest rate in the process is a win/win. My only worry is the externality of residential (and commercial to a certain extent) property values being inflated due to below market interest rates. My local credit union offered to "finance" (I paid cash, more like a title loan I guess) my 9 year old S2000 for 1.55%. There is no free lunch; market prices will adjust to the interest rates to eventually make the benefit null and void.

 

[steveny]

I concur - overall balance sheets for a substantial sector of our middle/upper class will be impacted in a huge way by no mortgage in 10-15 years. People always compare a shorter mortgage with investing in another asset but unfortunately I didn't ride a unicorn to work on a platinum rainbow this morning (sounds fun though doesn't it?).

In the real world, people piss away the vast majority of their desposible income on things that are worth 0-5% of their original price within a few years. The dumb cars we all cycle through on a regular basis are great investments compared to what people spend most of their money on (vacations, latest and greatest tech gear, fancy dinners, fancy hair cuts, $100+/m phone AND cable bills, etc.).

The combination of consumers piling money into their house instead of their boat plus paying a very small (reasonable IMO) interest rate in the process is a win/win. My only worry is the externality of residential (and commercial to a certain extent) property values being inflated due to below market interest rates. My local credit union offered to "finance" (I paid cash, more like a title loan I guess) my 9 year old S2000 for 1.55%. There is no free lunch; market prices will adjust to the interest rates to eventually make the benefit null and void.

As usual your so dead on accurate. The real question is what sectors and more specifically what stocks will be positively affected by this consumer with extra money in pocket after their house is paid off. I think its important to note that a more financially prudent consumer is going to opt for a 15 over a 30 year note. So I feel that's going to be a factor in what they will use their new disposable income on. They most likely won't be pissing it away on booming onion machines at Walmart. Even more so these companies who will benefit fifteen years out will be a bargain now as they aren't going to get that disposable income until that 15 year cycle is complete. In fact they will be getting even less as the 15 year note their consumer steps into now will be cutting into the bottom line of the companies sales for the next 15 years. Iwo, the company probably sells at a discount currently.
Sorta like the corvette syndrome. Average guy works his whole life saves up and on retirement buys a vette. Will the new consumer go for the Ferrari?

I agree with your final point only if interest rates increase which I don't see happening for a LONG time. Even then it'll be a really slow creep. The economy doesn't want big fat interest rates on either side of banking. No one wants to save when the rates are so low and everyone will continue to spend with low rates on borrowed money. It's good for the economy all the way around.