Mortgage rates are back down to historical lows in 2016 thanks to turmoil in China, geopolitical risk, and sliding oil prices. It behooves you to at least check what the latest rates are if you have not refinanced in the past six months. If you are a new homebuyer, it’s important to get as many bids as possible to get the best mortgage rate and terms as possible. LendingTree, with its massive network of mortgage providers is the best solution I’ve found online. They get multiple banks to compete for your business by simply filling out a one-minute questionnaire.
I recently checked LendingTree again when the stock market started panicking during the first 10 days of 2016 and I’m pleased to see mortgage rates for 30-year fixed loans and 5/1 ARMs are under 4% and 3%, respectively again. One bank online offered a jumbo 5/1 ARM for only 2.5% with 0 points. I proceeded to leverage that information to ask a couple traditional bricks and mortar banks to see what they could do, and they agreed to match.
A big part about growing your net worth is doing everything possible to minimize expenses. I believe everybody should at least own their primary residence to get neutral the ever rising property market. Once you own, it’s all about lowering your property taxes and getting the best mortgage rate possible.
MY TAKE ON INTEREST RATES
Mortgage rates have been going down for over 30+ years as you can tell by the chart. There is obviously a risk that interest rates will rise at some point in the future, but I’m in the camp that interest rates will stay low for years to come. Just look at Japan after their real estate bubble burst in the late 1980s. Their interest rates have hovered close to zero for 30 years!
I see a scenario where interest rates only inch up by about 1% maximum over the next five years because there’s still a lot of slack in the economy. There’s a large underemployed population and median household income has come down over the past decade from $59,000 in 2005 to now only $52,000 in 2016. The Federal Reserve will only raise the Fed Funds rate marginally. Even so, that doesn’t mean mortgage rates will go up because mortgage rates are more tied to the 10-year bond yield which has been declining due to all the risk in the markets.
In a continued low interest rate environment, I prefer taking out a 5/1 ARM amortizing over 30 years. A 5/1 provides a lower fixed rate than a 30-year fixed for 5 years, and then adjusts afterward (higher or lower). You can certainly go for a 30-year fixed loan if you want absolute piece of mind and believe interest rates will be aggressively higher in the future. But if the 5/1 ARM mortgage rate is at least 1% cheaper, then I would strongly consider an ARM. Take the monthly interest savings and save or invest it. There’s a interest rate hike cap that’s fixed for one year after the fixed adjustment of an ARM is done. You can always refinance your ARM before the fixed period is over like I’ve done many times before.
The goal is to save money by taking action. I’ve got three properties in San Francisco and Lake Tahoe and I’ve refinanced every single one of them over the past 12 years – some of them multiple times. My combined interest savings a month is roughly $4,000 thanks to the refinances. Over the life of my loans, I will be saving several hundred thousand dollars in interest expense!
When banks compete, you really do win. Search for the latest mortgage rates with LendingTree, one of the largest mortgage networks online today. You’ll get multiple competing bids within an hour. Either go with the best bid, or use the information as leverage to negotiate for the best rate possible with your existing mortgage lender. Rates are changing all the time, especially with recent turmoil in China. Use stock market volatility as a chance to save money!
About the author: Real estate is my favorite asset class to build great wealth over time because it is tangible, provides utility, and can generate perpetual income. I own three properties in San Francisco, one property in Lake Tahoe, and one property in Honolulu. Real estate makes up roughly 35% of my overall net worth, with the remaining portions in equities, private equity, and my online business. I worked in finance for 13 years at two major investment banks and received my MBA from UC Berkeley with an emphasis in real estate and finance. FinancialSamurai.com launched in 2009 and is one of the largest personal finance blogs on the web with roughly twelve million pageviews a year.