When Is The Best Time Of The Month Or Year To Refinance A Mortgage?

Refinance Your PropertyAs I was getting harassed at the car dealership the other day, it dawned on me there are optimal times throughout the month and year to refinance a mortgage due to human nature. Dropping by the car dealership every other week is one of my favorite hobbies because I get to go for test drives, soak up that wonderful new car smell, and curiously practice my negotiation skills all for free! Try it some time.

I’ve refinanced my primary mortgage five times, and have refinanced my other rental properties by a combined 10 times in the past 10 years. With each refinance, I get better at negotiating. I learn where I can press for credits and when I can no longer squeeze blood from stone. One mortgage officer called and yelled at me when I asked for another $250 credit at closing given he promised a no out of pocket refi. I got him to own up to our agreement, but we never did business again.

I’ve gotten to know five mortgage loan officers across various traditional banks such as Citibank, Bank Of America, and Chase. One loan origination officer also works at Quicken Loans, my favorite online mortgage company to check real rates. They’ve all shared with me some of their motivational points, which are all the same. With my experience in refinancing, working in finance, car dealing, and personal relationships with people in the mortgage business, let me share with you some discoveries I’ve found to get the best rates possible.

THE BEST TIME TO REFINANCE A MORTGAGE

What banks recommend: If it’s up to the loan officer, the best time to refinance a mortgage is always because they are paid through transaction volume. The more mortgages they refinance or originate, the greater they get paid. In this current interest rate environment, if you have not refinanced or checked rates in the last 6-12 months, I’m pretty sure you’ll be pleasantly surprised to find out you can get a similar mortgage at least 0.375% lower than your existing rate. I know I did.

What I recommend: I only recommend homeowners refinance their mortgage if they can lock down a similar mortgage at least 37.5 basis points (0.375%) or lower AND break even within 24 months. If you can do this, refinancing now is a no-brainer. If you can break even within 36 months, that’s OK provided you KNOW you plan on staying in the house for another five years. A break even point longer than 36 months is just not worth the time or effort because nobody knows the future for sure. The median homeownership duration is only 5.9 years to give you a point of reference.

The current situation: Thanks to a still shaky economic recovery, investors are still piling into US Treasuries that yield roughly 1.75%. In other words, investors would rather invest in a risk-free asset that barely keeps up with inflation instead of buying Apple stock. If it was a bull market, investors would sell treasuries (gov’t bonds) and buy stocks or other instruments because investors feel the risk reward ratio is better. The Federal Reserve is flooding the markets with liquidity by buying $40 billion worth of mortgage back securities a month indefinitely. QE3 helps keep rates low given there is an inverse relationship with fixed income asset price and its yield.

Slow economic recovery + government intervention means everybody should be refinancing their mortgages now if they have the equity, regardless of what time of month or year. But now it’s time to strategize when to refinance to get an even lower rate at the margin. It’s all about understanding a person’s motivation and understanding the spread.

THE BEST TIME OF THE MONTH TO REFINANCE

Each mortgage loan officer has either a monthly or quarterly target to reach. Practically every single sales department has such monthly and quarterly quotas, especially publicly listed companies given they have to report results every quarter. If you’ve ever been to a car dealership, you can sense they are much hungrier the last week of the month vs. the first week of the month!

Since very few people can keep up their selling intensity every single day without burning out, most people save their energy for the last two weeks of the month and the last month of each quarter. You can see from plenty of organizational behavior charts how effort really drops off after a particular deadline. Everybody knows what it’s like to relax after studying so hard for a mid-term or final!

Conclusion: The best time of the month to refinance your mortgage is the last two weeks of the month. The best time of the quarter to refinance your mortgage is the last month of the quarter: March, June, September, December.

THE BEST TIME OF THE YEAR TO REFINANCE

Year-end bonuses make up a large portion of one’s total annual income in the financial services industry. There are plenty of cases where a year end bonus can be 2X-3X your base salary if you are a star performer. As a result, driving revenue for the firm matters when bonus decisions are being made. Nobody and I mean nobody remembers much of what you did the first quarter of the year when it comes time to pay your year-end bonus. There is asymmetric emphasis on what you did in the second half of the year, and more importantly what you did in the 4th quarter!

Another important thing to know is when each firm’s fiscal year (as opposed to calendar year) ends. It would be nice if all companies’ fiscal years were the same as their calendar years starting on Jan 1, ending on Dec 31, but this is not the case. Some companies have fiscal years end on June 30th! In other words, their fiscal year for accounting purposes, which includes paying bonuses starts on July 1 and ends on June 30. Thankfully, most banks have fiscal years ending on Dec 31.

Assuming books close on Dec 31, bonuses for the fiscal year must be determined at least two weeks before i.e. Dec 15 or sooner. Hence, mortgage loan officers know to be the most aggressive in closing loans in the 4th quarter of the year. The idea is to finish the year strong, make amends for a bad first half, get paid a handsome bonus sometime in January, cruise for the first half of the new year and repeat!

Conclusion: The best time of the year to refinance your mortgage is in the 4th quarter: October, November, December. The best time to refinance during the 4th quarter are the last two weeks of October and November, and the first two weeks of December.

WHY DOES TIMING WITHIN TIMING MATTER?

Banks work on spreads. If they can pay 1.5% for $1 million in capital (deposits) and lend out at 3%, they make $15,000 a year provided you honor pay back the loan. Look at current savings and CD interest rates of 0.1-2%. They are abysmally low. Meanwhile, if banks can earn a 1% spread on billions of dollars of loans, you can see how they’ll make lots of money!

Mortgage loan officers have wiggle room as to how much spread they want to make off your loan. For their best customers, such as those who provide consistent referrals, banks will often charge a tiny spread or no spread just to retain the relationship. Such clients might have multiple different product accounts open which are more lucrative for the bank. For new customers who don’t have a lot of assets, the spreads are wider.

When mortgage loan officers are aggressively trying to hit their quotas, they will give you more wiggle room by narrowing their spread or providing more credits. Not only is generating revenue important, loan officers like to show a large number of loan originations or refinances. There is a customer lifetime value for every customer as chances are there will be future refinances and healthy referrals.

Bonus: The best time to check rates online is Saturday and Sunday based on a survey of over 100 checks. Online mortgage companies like Quicken Loans are always open for business, however, traffic/inquiries are generally down 25-50% over the weekends because people are having fun doing other things. This site’s traffic also fluctuates by 25-50% from weekends to weekdays. As a result, online mortgage companies give slightly better incentives if you check over the weekend.

KNOWLEDGE + ACTION CREATES WEALTH

It’s important to understand how systems work. Now that you understand how mortgage loan officers are incentivized, you can use this knowledge to get yourself the incrementally best rate possible. I recommend everybody at least check online through Quicken Loans given they provide free, no obligation quotes with the lowest rates. You should also consider checking your credit score given the average credit score for a rejected mortgage applicant is 729! The average credit score for an approved applicant is over 760. You can check your credit score for free with TransUnion.

Happy savings!

Best,

Sam

Free Real Mortgage Rate Quote By Quicken

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.

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Comments

  1. says

    That’s great information. Usually anything sales driven always gets attention at the month/quarter/year end, so that’s a good thing to have. You have to start the process a bit earlier since it takes a while from when the application until it actually closes.

  2. says

    When I refinanced earlier this year I couldn’t find a lender that would offer no closing costs. While it makes sense to refinance in conjunction with rates that are dropping, the closing costs will keep pushing back the years you need to stay in your home to reach break-even.

    What are the best tactics to use to get a lender to waive closing costs?

  3. says

    This is a genius post. I love how you’ve refinanced so much and enjoy the art of negotiation. Getting my mother to refinance is like pulling teeth and it drives me crazy.

    Timing can make a difference like you’ve said and I certainly see cycles in my own job when I’m more willing to go the extra mile for someone. Tapping into that is a smart tactic!

    • says

      Help yo mama! It’s interesting how some people are so reluctant to save money. Go through a little elbow grease, lock in a lower rate, and save money for years to come sounds worth it to me!

    • says

      I do. Anybody who cannot wait until after the holidays, and during better whether to list their property is a much more motivated seller imo. Gems can be found! Right before New Year is when I found my current house.

  4. says

    This guide is great if you go the traditional banking route. If you hit an independent mortgage broker, the best time to go is whenever they’re in a good mood. The amount of wiggle room they have on rates is huge – and no bonuses for those guys!

    I sometimes wonder why mortgage brokers don’t run a groupon-style deal. Something tells me if 10 people showed up with $500k mortgages demanding the “best possible rate” they’d get a heck of a deal on their refinances. When my dad was in the business, he would have killed for that kind of day. A half-point on $5MM is a pretty good haul.

  5. says

    I guess I am right on target in looking to purchase now. We are finding that everything seems to have 2 offers. I agree that buying at the end of the month is the best time since bankers are looking to make those sales goals. Nice post.

  6. says

    Great to know. My bank also has “sales” during a month, where they don’t charge any fee to refinance. Don’t remember when that was last, I think near the end of the tax year, i.e. March (UK).

  7. says

    Lovely post Sam!
    I’m one of those who has been on the fence whether I want to start negotiating early or wait a few months before the mortgage is up. Personally I have 1.5 yrs left on this mortgage, the rate is not bad at 3.6%, because even if I chose variable I’d only get it at around 2.99% roughly. More importantly, I don’t want to pay any $$ on the penalty, and I’m certain one would exist if I broke the term earlier.

    • says

      You sure about the pre-pay penalty? If not, double check with your mortgage loan officer. I’ve never had one, and I’ve refinanced 15+ times already. Perhaps b/c I explicitly tell them no pre-payment penalty.

      A 0.6% spread sounds like it’s worth refinancing. I don’t wait until expiration. I act when the spread is wide enough.

      • says

        I’m pretty certain about the penalty, however for shits-and-giggles, I should look into it and how much the penalty would actually end up being.

        Also I think we’re talking about two different penalties. There is no pre-pay penalty, but there is a penalty for early termination of your mortgage agreement, even if you’re resigning again.

  8. says

    Thanks for the great information Sam. I always refinanced when I’ve noticed a 0.5% decrease in the rates. I’ll have to look more closely at the 0.375% rule. Shopping around is really important. I’ve found a loan officer in my area that I can almost always get great rates through and the closing costs are next to nothing (around $1k). I also refer a lot of people to him, so I’m betting this is why I always get a great deal.

    • says

      0.5% decrease is just as well. I just start really looking when I see rates below 0.375% b/c of my own mortgage amounts. Everyone is in a different scenario.

      What I’ve found is that once rates are at 0.375% below what I’ve got, I can often haggle to get down to 0.5%, or the markets will push them lower for me.

  9. Mr says

    So… speaking of mortgages. Curious to know your thoughts on Mortgage REITs. WSJ had an interesting article on them recently…

    FYI I’m going to re-fi soon! I’m @ a 3.99% rate on a 5/1 ARM… looks like I can easily get a loan over 100 basis points lower (with no fees). No brainer…

  10. says

    Negotiating can be an art. Whether we like it or not, we will come to bump into it and do the negotiations. I like your advice on practicing the negotiation skills. Avoiding it and seeing it as a task would not help with our personal growth.

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