Refinance Your Mortgage

Dear Homeowner,

Mortgage rates are at historical lows 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. 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 the week of October 13, 2014. The 10-year yield collapsed from 2.3% all the way down to 1.84% in one day as investors fled to the safety of US bonds. One bank offered a jumbo 5/1 ARM for only 2.375% with 0 points. I wanted to refinance, but I couldn’t because my former home of 10 years is now a rental, and rental mortgage rates are higher.

Had I not refinanced back in 2012 before I retired from Corporate America, I would be paying $300 more a month in interest for the next 60 months equaling $18,000. 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. The risk is to the upside that interest rates will rise at some point in the future. That said, interest rates can stay low for a very long time as they have been in Japan after their bubble burst in the late 1980s. Interest rates all depend on the economy. 

Historical Mortgage Interest Rate Chart

I see a scenario where interest rates only inch up by about 1% 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.

Regards,

Sam

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 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. There are those people who wait for the world to come to them. I like people who blaze their own trail instead. FinancialSamurai.com launched in 2009 and is one of the largest personal finance blogs on the web.