As 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 LendingTree, my favorite online mortgage network 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.
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.
RECOMMENDATIONS FOR HOMEOWNERS
1) 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. Consider using LendingTree to get multiple offer comparisons in a matter of minutes.The 10-year yield is still very low at 2.5% as of 11/24/2014. If you haven’t refinanced in the past 12 months, I’d at least check to see if you can lower your rate. When banks compete, you win.
2) Make sure your credit is good and correct. Take a moment to check your free credit score through GoFreeCredit.com, a company I trust. Over 30% of credit reports have errors which can really bring down your borrowing capabilities. I once had a $8 missed utility bill payment which crushed my credit score by over 100 points! Save yourself some serious mortgage hassle and delay by knowing what your credit score is beforehand. Don’t waste your time by applying for a mortgage without knowing your credit score first.