The beauty of an economic downturn is cheap credit. It’s ironic, because cheap credit is one of the main causes of this collapse in the first place! That said, for those of you with mortgage debt, now is a great time to call your local bank and check up on rates. Refinancing can be a daunting process, but it shouldn’t be with the right representative and proper frame of mind.
I recently refinanced one of my rental properties and now is a good time to share with you some key things to think about and assess. Hopefully by the end of this article you will be able to make an informed decision and save lots of money as a result!
Knowing when to refinance is like being a bond trader. Bond traders obsess over inflation assumptions, and you should have at least a basic assumption as well. Clearly, there has been tremendous monetary expansion recently, which should ultimately lead to higher inflation. Basic economic theory says that for every new $1 dollar bill printed, there will be a $1 increase in prices in the overall basket of goods eventually. The key word is eventually, which could be decades away.
People have been waiting for higher inflation, and therefore higher rates for the past decade. Ironically, those with short-term fixed mortgages (ARMs) are this century’s winners, because rates are resetting at equal to lower levels than when they were originally fixed!
Inflation has been coming down now for over 25 years, and I see little reason to expect inflation to suddenly jump higher given the tremendous output gap in the economy. If inflation does start rising, at least you know that your assets are by definition also rising in nominal value.
The figure to watch is the 10-year US treasury yield. Currently at
3.4% 2% 2.7% 1.85% as of 1/20/15, the yield is hovering close to all-time lows. Meanwhile spreads between treasury yields and bank mortgage rates have narrowed since the crisis. Most long term duration mortgages are related to the 10-yr bond yield, hence whenever you see the stock market crashing,watch bond prices rise, and yields fall. This is the exact time to call your mortgage broker.