Refinance Your Mortgage

Dear Homeowner,

Mortgage rates are at historical lows in 2015 and 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.

In the fall of 2011, I refinanced my jumbo 5/1 ARM at 3.625% down to 3.125% with no fees or cash outlay. I thought I was set for another 5 years until I checked again in April, 2012 when the 10-year yield dropped to 1.85% from 2.1. I discovered I could refinance again just 5 months later for only 2.625% with no points!

I then more recently checked LendingTree again when the stock market started panicking during the end of January, 2015. The 10-year yield collapsed from 2% all the way down to 1.62% in one week as investors fled to the safety of US bonds. One bank online offered a jumbo 5/1 ARM for only 2.25% with 0 points. I proceeded to then leverage that information to ask a couple traditional bricks and mortar banks to see what they could do, and they agreed to match!

I’m refinancing my 2.625% 5/1 Jumbo ARM with 2 years fixed left to go down to a 2.25% 5/1 Jumbo ARM. Once the mortgage refinance is done, I will be saving over $500 a month in cash flow given it is a $1 million dollar mortgage. Over the next 60 months, that is a $30,000 cash flow savings and $18,750 in mortgage interest savings. By just making a simple inquiry, I was able to save a lot of money and use the interest savings to invest in the stock market to help further secure my financial future.

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! 

Historical Mortgage Interest Rate Chart

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. The Fed will not raise rates until they see stated inflation (CPI) creep towards 3%. We’re still in the low 2% range.

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 1.5% 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 four properties in San Francisco and Lake Tahoe and I’ve refinanced every single one of them over the past 12 years – some of them three times. My combined interest savings a month is roughly $3,200 thanks to the refinances. Now I’m about to pay off one mortgage by end of 2015, 17 years earlier than the 30 year amortizing period.

One final point: A mortgage interest rate is not only determined by US Treasury yields and Federal Reserve policies. Mortgage interest rates are also determined by bank spreads. When banks have too much cash (overcapitalized like they are now) and are hungry for your business, banks will be willing to accept lower spreads (lower profitability) in order to win your business. This is why although the 10-year yield was the same in 2012 and in 2014 when I looked to refinance, the latest mortgage rate quote I got was 0.25% lower because banks are now more aggressive.

When banks compete, you really do win. Search for the latest mortgage rates with LendingTree, one of the largest mortgage networks online today.

It’s also a good idea to check what your latest credit score is before refinancing, taking out a car loan, or even applying for a job. I had a $8 late utility payment I had no idea about that crushed my credit score by over 100 points to 697. This caused a two-week delay in my mortgage refinance, and tons of stress. My previous tenants had forgot to pay the last day’s utility bill, and the utility company never contacted me! You can check your latest TransUnion credit score here. The Federal Trade Commission conducted a study showing that 5% of credit reports have errors.

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.