The Refinance Window Is Closing: Historical Charts Of The 10-Year Yield

10 Year Yield Chart Over 1 Year

Those who’ve been waiting to refinance for the past 12 months have missed the boat with the US 10-year treasury yield surging to 2.15% as of 5/31/2013 vs. a low of 1.4% in July, 2012. Everything from 5/1 adjustable rate mortgages to 30-year fixed rate mortgages have all moved higher by similar, but not exact magnitudes due to durational differences.

Now that it’s 5/10/2014, the 10-year yield has climbed even higher to 2.6%. But despite this climb, mortgage rates have stayed flat or come DOWN further because banks are accepting lower margins to generate more business.

I recommend refinancing as many times as possible if existing rates are at least 0.5% lower and you can break even on the refinance costs within 24 months. Not refinancing due to laziness or fear is quite stupid. It’s interesting to note that the larger your mortgage to refinance, the lower your explicit refinance costs. Given I believe the ideal mortgage amount is $1 million dollars (if you can afford it) for tax purposes, my refinance costs are often “no cost” with fees simply embedded in the new lower rate. There is no free lunch, but it sure feels that way when a bank says do you want a 0.5% lower rate that will cost you nothing out of pocket!

SO WHAT IS A HOMEOWNER SUPPOSED TO DO?

It’s all about perspective in finances. Although you may have missed the refinance window for the past 12 months, let’s take a look at a two year window to see where 2.15% or higher stacks up.

10 Year Yield 2 Year Chart

As you can see from the chart, the two year high for the 10-year yield is 3.2%. Going from 2.15% to 3.2% is a huge 50% move higher which should scare the bejesus out of bond holders who will lose a lot of money since principal price moves in reverse of yields.

As a mortgage holder, you are actually also a bond investor. Let’s say you refinance $100,000 to 3% for a 5/1 ARM with the 10-year yield at 2.15%. In the next year the 10-year yield does indeed move up to 3.2% making 5/1 ARMs now 4%. You essentially sold short $100,000 worth of bonds at 3% and made $25,000. How so? To get to a 4% interest, your original $3,000 annual interest cost must now be divided by $75,000 in principal (3,000/75,000 = 4%). Read this paragraph carefully again as I know the inverse relationship between interest rates and principal can get confusing.

Look at the above situation from the banks point of view. They hate receiving only 3% a year when they can now receive 4% a year. Good thing they’ve matched assets and liabilities. Banks hope you either prepay your mortgage, refinance to a higher rate, or sell your property so somebody else can get a new higher rate mortgage. As a mortgage holder in an increasing rate environment, you want to hold on until the very end and never prepay!

Based on a two year chart interest rates still look low if you are kicking yourself for not being proactive enough to at least get a no obligation quote online.

INTEREST RATES OVER A 10 YEAR TIME FRAME

10 Year Yield Over 10 Years

Even if the 10-year yield ramps to a two year high of 3.2%, that’s still quite low compared to a 10-year high of around 5%. I don’t think we’ll be getting anywhere close to 5% over the next 10 years, but we shall see. What’s most interesting in this chart is how the 10-year yield only got to a low of 2.2% during the DEPTHS of the financial crisis. Four years have passed and the economy is much stronger yet the 10-year yield is still only at 2.15%. Got to love central bank intervention!

Bonds have been in a 30 year bull market and I’ve been going along for the ride for the past 10+ years as a homeowner. Not only have rents increased but so have property prices despite the correction. Meanwhile, the value of homeowner’s mortgages have also increased as I’ve explained above. Locking in a 30-year fixed mortgage rate for the past two decades has been a suboptimal proposition due to the decline in rates. Please read Adjustable Rate Mortgage Or 30-Year Fixed where I argue why locking in long term wastes you money. The best mortgage option would have been based on a 1-month LIBOR rate. The question is what now?

Even with the recent rise in interest rates, if you can find a new mortgage rate 50 bps lower than your current mortgage rate, with a duration that matches your risk tolerance, then I would still refinance. Over a 2-30 year period, mortgage rates are still dirt cheap. The big fear in the bond market is that the Fed stops feeding us their juice. They’ve got to slowly ease off their monetary stimulus probably over a course of five years if they don’t want to hammer stock market addicts.

WHAT I’M DOING TO POTENTIALLY MAKE MONEY

My primary mortgage was refinanced a year ago before I left my job thank goodness. Otherwise, I would never have been able to refinance due to a lack of W2 income. Refinance before quitting please! My vacation property received an out of the blue loan modification earlier this year so that’s set. The only thing I’m left with is my primary rental property which has an interest rate of 3.35% with four years left on a 5/1 ARM. I would ideally like to refinance this ARM to another ARM at closer to 2.75%, however, the mortgage amount is small and I plan to either sell the property within five years or just let it float after the lock is over. In four years, the principal will be reduced by another 13% or so if I add no extra payments, giving me some buffer in case rates rise.

Bond Fund IEF 1 Year Chart

The investor in me does not believe the Fed will allow the 10-year yield to continue ramping so soon. As a result, I am going LONG the 10-year bond (believe yields will fall from 2.15%) by buying the ETF, IEF (see chart). I don’t plan to make or lose more than 3% on IEF, as a result I’ve dumped a chunky 35% of my IRA into the name. IEF is my hedge against a collapse in equities and a place to park my cash which earns nothing. My year-end target for the 10-year yield is 2% or lower.

The irony is that the higher the 10-year yield goes, the more susceptible equities are to a pullback because bonds become more attractive relative to equities. The bullish way to look at a rise in interest rates is a rise in monetary demand due to an improving economy. Finally, for those interested in buying property, maybe, just maybe a rise in rates will slow down the torrid rise in property values (March prices were up 10% YoY). Then again, the herd is probably thinking “buy now or be priced out forever” again.

Recommendations For Homeowners

* Check Your Credit Score: Take a moment to check your free credit score through GoFreeCredit.com, a company I trust. 30% of credit reports have errors, which could put a serious hamper on your refinancing or new loan borrowing abilities. I had a $8 late payment I didn’t even know I owed crush my score by 100 points come up during my last refinance!

* Shop around for a mortgage. LendingTree Mortgage offers some of the lowest refinance and new mortgage rates because they have a huge network of lenders to provide mortgage loans, home equity loans, and home equity lines of credit. If you’re looking to buy a new home, consider using LendingTree to get multiple offer comparisons in a matter of minutes. When banks compete, you win.

Updated: 5/10/2014

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

You can sign up to receive his articles via email or by RSS. Sam also sends out a private quarterly newsletter with information on where he's investing his money and more sensitive information.

Subscribe To Private Newsletter

Comments

  1. says

    I did not qualify for a mortgage when I bought my current home so I got a HELOC instead. I am going to convert to a fixed rate mortgage when I think that rates are going to rise. I would never have an ARM because the financial unknown is too unstable for my small income.

  2. Mike says

    Sam, I have a couple of properties as follows:
    1. Primary Residence:
    1st: 374k, 30yrs @ 3.75%
    2nd: 73k, 30yrs @ 7.5% (did two loans to avoid Jumbo and PMI)
    2. Investment Prop: 213k, 30yrs @ 3.625 (pulling in $2,500/mo rent)

    Both the primary residence 1st and the investment prop notes were recently refinanced to the rates shown above. I think I’m okay on these new rates but my concern is that 2nd on the primary residence. Doesn’t seem to be much of a market to refi these types of loans. Any thoughts on that 2nd loan in particular and my overall loan situation in general?

    • says

      Mike,

      To be frank, you are getting raked over the coals with a 7.5% 30-year rate. If pay that off or have a stern talk with the person who convinced you to lock that rate and ask if they can modify it down to 6% or lower at least.

      Good luck

  3. says

    One of the most enlightening things you’ve shared related to finance is the 10 year treasury yield in regards to interest rates and the attractiveness of stocks -vs- bonds. As that rate rises, bonds become more attractive.

    I’m in a 15 year, 2.75% rate for my primary home at the moment and actively seeking a rental property with my wife, which hopefully we can get soon since the rates do appear to be going up. It also seems like the 5/1 adjustable rate might make the most sense when getting our rental property as well as I was going to just do a 30 year loan.

    Lastly, I used a good chunk of my stock cash value to get into IEF with a hope of 3% return by end of year, while I think the stock market is ready to pull back a little. But time will tell for sure. I could be wrong and if I am, I’ll at least have a good story to tell :)

    Thanks for sharing.

    • says

      2.75% for a 15-year is great Jeremy. I’d just keep that loan until it’s paid off.

      If IEF provides a 3% return, that would be huge for such a security. But, I also expect IEF to lose 3% as well, hence don’t count your chickens yet. If the 10-year yield moves back down to 2% or lower, I’m selling my IEF position.

    • nbsdmp says

      2.75% is beyond awesome for a 15 year fixed, but buying a rental on a 5/1 arm has disaster written all over it. I cannot count the # of people I know who have screwed up their financial future or at least set themselves back a decade by doing something exactly this. The only exception I would say is if your net worth far exceeds both the value on your primary and the rental you would buy…The math definitely says borrow super cheap money, but we should all have learned by now that slow, steady, and conservative wins the race if financial freedom is the goal.

      • says

        Not sure having a 5/1 is “disaster written all over it” when everybody who has had 5/1 ARM over the past 10, 15, 20, 35 years have seen their interest rates float LOWER since rates have gone lower for 30 years. Furthermore, as rates have gone lower, ARM holders have been able to refinance to another ARM at lower rates. I know you mentioned in the past you paid cash for your house, but the fear mongering on ARMs is overblown.

        The people who get in trouble are those who couldn’t afford a house in the first place.

        • nbsdmp says

          not so much that it is an 5/1 ARM, but more about expanding your risk factor by having another mortgage to feed when you don’t have your home paid off yet. I get it that peoples risk tolerance is different, it is just my opinion that it is better to have zero debt. I know lots of people under tremendous financial stress who have debt, I know zero people under stress that don’t have debt hanging over their heads. Getting rich slowly is boring…

  4. says

    I got most of my family to refinance last year so I’m glad we got the timing pretty good with that. I didn’t realize the 10 year has risen so much. We all want to think super low rates will last forever but that’s just not going to happen. We gotta seize opportunities when we have them.

  5. Laura says

    “As a mortgage holder in an increasing rate environment, you want to hold on until the very end and never prepay!”

    I’m not a homeowner and am pretty ignorant about mortgages, but I assume you mean prepaying as in paying more than the monthly minimum. Do you think there are circumstances in which it makes sense to prepay?

  6. says

    I’m currently in the market for an investment property, so hopefully the mortgage rates don’t move too much over the next few months. Even though they have risen they’re still below the 4.125% I got on my primary mortgage in Dec of ’11 which I guess I should look into trying to refinance while it’s still worth it!

  7. Chris says

    Sam, you say “As a mortgage holder, you are actually also a bond investor. Let’s say you refinance $100,000 to 3% for a 5/1 ARM with the 10-year yield at 2.15%. In the next year the 10-year yield does indeed move up to 3.2% making 5/1 ARMs now 4%. You essentially sold short $100,000 worth of bonds at 3% and made $25,000.”

    At a fundamental principle, doesn’t this mean that it would be best to refi to a FRM when the only way for rates to go is up? After all, if the 10-year yield moves up to 4.3%, then you have “made $50,000″. Of course, realizing that there was never any money made on the transaction in either case anyway.

    • says

      A 5/1 ARM is still fixed for 5 years. My argument is that the spread between short duration and long duration is too wide (expensive), which leads to a waste in money as rats have come down for 30+ years now.

      My vacation property is fixed at 4.25% for 30-years, but that was b/c that’s all the loan mod offered. Beggars can’t be choosers. If I could do the loan mod at 3% for a 5 year fixed ARM, I would.

      I don’t think the 10-year is moving back to 4.3% either. Maybe 3% in the next five years, but not 4.3%, unless it is a RAGING bull market with huge inflation, in which case, great! Asset prices will be on fire.

  8. says

    Interestingly, my mortgage holder (Wells Fargo) called me to refinance my mortgage. Despite my small balance they were willing to give a “great” deal at 4% (15 yr)! It turns out that my current mortgage at 5% is effectively lower because I am making additional principal payments. Their offer was no cost, but it would lengthen the period for repayment by 2 months. The only way this would make sense is to shorten the repayment period. The interest rate was no bargain.

    • moshennik says

      you will be saving 1% annually.. and there is no prepayment penalty, I assume, so you will be paying down the loan faster with the same payments.
      I struggle to understand how it can possibly 5% be < 4% ?

      • says

        I am checking with someone else in the bank, but they told me there are 2 more payments than my current scheme. It may have something to do with the no cost loan and the effective rate I am paying due to the additional principal payments.

        • moshennik says

          Possibly they are rolling in the costs of the loan into the new loan? This may or may not be a good deal for you. (with 4% though i feel it should really be a no-cost refi).

    • says

      KC, wifey and I refi’d to a 15 year @ 3 1/8 FRM (from 15 year @ 4 1/4 FRM) and absolutely won’t be making any changes to that unless we have to sell the house off for some reason.
      After mortgage interest writeoff that’ll be good for at least the next 5 years if not longer, the rate goes down to 2.34%. It wasn’t a no-cost refi since it cost us about $2,300 out of pocket, but we simply used one of the two mortgage payments – due to timing – that were skipped during the refi to pay for that cost.

  9. moshennik says

    I think we are in a cycle of

    - economy is not growing fast, help help
    - FEDs buy some more paper
    - Economy starts to recover a little
    - FED announces it will buy less (<—- we are here)
    - Economy slows down (back to the beginning)

    Today interest rates are rising.. they will fall again, as I believe the economy is still too fragile for a real recovery.

  10. says

    I actually just purchased a home about a month ago so I don’t think I will be doing a refi anytime soon. Especially since I am now self employed. Great info though. Is your vacation property in the states?

  11. Brian says

    Excellent advice we should all listen to. Great article…and this: “Going from 2.15% to 3.2% is a huge 50% move higher which should scare the bejesus out of bond holders who will lose a lot of money since principal price moves in reverse of yields.” So true!

  12. Eric Shun says

    Many blended Fidelity and Vanguard mutual funds are comprised of a mix of 60% stocks / 40% bonds. If the stock market pulls back and, at the same time, interest rates rise, then that is doubly bad for such mutual funds.

    What’s a mutual fund investor to do right now?

    With an improving residential real estate market, is it too late to get into a home-builder mutual fund, or even a GNMA bond fund?

    • says

      I’m personally waiting for a pullback. And with real estate, I prefer investing in a physical property so I’ve got control.

      On 5/31/13, equities got crushed and bonds also sold off. But bonds sold off less, so it is the lesser of two evils. But it is the increase in interest rates that helped spur a decline in equities. Everything is connected.

  13. Mr. B says

    Sam,

    Have you written any articles about determining fair purchase price of real estate? You write often about refinancing and renting, but those are variable. The one thing you can’t change is the purchase price… and as we know Real Estate Agents don’t always have your best interests in mind. It’s always a good time to buy and sell!

    Right now all I have to go by is comp sales… and Zillow. There must be a better way!

  14. Mr. B says

    Haha I’m with you there. Maximize on cloudy days… when it’s 70 degrees and breezy I think we ALL have a tough time.

  15. says

    I’m a big fan of refinancing–I did my first refi in Sept, less than two years after buying my place. A friend with a great income and credit rating, who had an older mortgage at almost 5%, thought I was nuts to do the work, and told me she and her husband weren’t looking for a refi because it “wasn’t worth it”. These of course are the same people who won’t order out for pizza without a $2 coupon. If saving $2 is worth it, surely saving a hundred or more each month on your mortgage interest is…

  16. TT@SF says

    Sam, great post!

    Have been looking at refi lately, especially after the rate run-up over the last month or two, would appreciate your thoughts here –> primary residence, 800K@2.75% 5/1ARM ($7K penalty if prepaid before 10/2013), 70% LTV, plan to stay/hold the property for long (could turn into rental at a later time).

    Given the recent pace of rate rise (and rate trajectory post-QE), do you think it’s better to seize the current rate and turn my 5/1 ARM into a 30-year fixed (4.25%, w/$10K fees/points) and be done with it? If 30-FR is a better long term option, should I bite the prepayment penalty bullet now and lock the rate, or wait till October assuming the rate will go rise as madly as it has been (better yet, pull back some?)

    Thanks!

Leave a Reply

Your email address will not be published. Required fields are marked *