Dear Homeowner Or Potential Homeowner,
Mortgage rates are back down to historical lows in 2016 thanks to turmoil in China, Brexit, sliding oil prices, and a highly volatile stock market. 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 or want to refinance, 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 (always check when the stock market sells off because the bond market gets bid up) and I’m pleased to see mortgage rates for 30-year fixed loans and 5/1 ARMs can be had for 3.75% or less and 2.75% or less, respectively. In fact, I’m currently in the process of refinancing a 5/1 ARM jumbo now for 2.375% for about $3,100 in fees.
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 35+ 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 and are now NEGATIVE as of 2Q2016. Sweden, Australia, and 20+ other countries have zero or negative real interest rates at the moment.
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. Why pay a higher rate when the average length of homeownership is 7 years and interest rates are in a structural decline? 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. There’s also a lifetime interest rate cap that’s usually no more than 4% – 5% higher than the initial rate. You can always refinance your ARM before the fixed period is over like I’ve done many times before.
If You Currently Have An ARM
If you have less than two years remaining on your adjustable rate mortgage before it becomes variable, I highly recommend you refinance today or before the fixed rate ends because ARMs are tied to LIBOR rates once they are variable, and LIBOR rates have surged higher. The London Interbank Offered Rate (LIBOR) is a short-term rate tied very closely with Fed Funds rate, which is the overnight interbank lending rate in the US. As you should be aware, the Fed finally started raising the Fed Funds rate in December 2015 and will continue to do so to prevent inflation from going out of control.
Here is the latest LIBOR rate chart, which shows the climb.
The great thing when you refinance an ARM is that banks based the initial 3, 5, 7, or 10 year fixed rate based on the 10-year bond yield, which has remained relatively stable. The banks are essentially SUBSIDIZING you with a lower rate in the beginning to get your business.
Take Advantage Of Lower Rates
The goal is to save money by locking in a new low rate now before they go up. I’ve refinanced three different properties over the past 13 years multiple times, and my combined interest savings a month is roughly $4,000. That adds up to well over $1,000,000 in interest savings over the life of the loans! If you can find a home that’s a good deal, you can afford the payments, and plan to stay there for 10+ years, then I would take advantage of record low interest rates and buy property.
REAL ESTATE INVESTMENT ALTERNATIVES
Real estate crowdsourcing opportunities: If you don’t have the downpayment to buy a property or don’t want to tie up your liquidity in physical real estate, take a look at RealtyShares, one of the largest real estate crowdsourcing companies today. Real estate is a key component of a diversified portfolio. If you study the asset allocation mix of college endowment funds and high net worth individuals, you’ll see real estate weightings of anywhere between 10% -30%.
Real estate crowdsourcing also allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. For example, here in San Francisco, capitalization rates are only about 4%. But you can find commercial real estate or multi-unit properties in the Midwest for 10-15% annual returns.
Check out my RealtyShares review as well. With interest rates remaining low, real estate continues to be an attractive asset class due to its attractive yield.
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 40% 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 organic pageviews a year.