If you haven’t refinanced your property in the past several years, it’s worth checking the latest rates today. The 10-year yield is back below 2.5% as Wall Street economists scurry to revise down their interest rate assumptions once again. I swear they have the best jobs on Earth because they never, ever have to be right.
I am a firm believer that interest rates will stay at these levels +/- 1% for years. Information transfer is instant nowadays thanks to the internet, and policy makers are much more adept at managing inflation and unemployment in America. As a result, go with an ARM rather than a 30-year fixed mortgage to save yourself money.
The general rule is that any time you can lower your interest rate by 50 basis points (0.5%) and break even within two years, you should refinance. Nothing is more beautiful than locking in a low rate and paying down the loan with ever-weakening dollars thanks to inflation.
Unfortunately for landlords, refinancing a primary mortgage is simple compared to refinancing a rental property. The reason being that refinancing a rental not only requires various Home Owners Association board members to cooperate with the process if you own a condo, the bank does much more due diligence.
From the banks point of view, lending money for a rental is riskier because the default assumption is that you require rental income in order to pay back the mortgage. Therefore, the bank needs to add an added margin of safety in the form of a higher mortgage rate to compensate for their risk. Rental mortgages are usually 25-50 bps higher than a primary residence mortgage.
I just rented out my primary residence this summer at a rent that’s almost double all my costs because I’ve lived there for 10 years. But banks still quoted me for mortgage rates at least 25 basis points higher than the primary mortgage I took out for my new home. As a result, I kept my 2.625% 5/1 ARM mortgage with three years left on the fixed term.