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The Federal Reserve Doesn’t Control Mortgage Rates, The Market Does

Published: 03/01/2023 by Financial Samurai 33 Comments

Ever wonder why mortgage interest rates sometimes don’t decrease when the Federal Reserve cuts interest rates and vice versa? The simple answer is that the Fed does not control mortgage interest rates. The bond market does. However, the Fed’s rate hikes do influence where the long bond yield goes.

The Federal Reserve controls the Fed Funds Rate (FFR), which is an overnight interbank lending rate. An overnight rate is the shortest lending term. This means shorter duration lending rates such as credit card interest rates and short-term car loan interest rates will be affected. Not so much longer-term mortgage rates.

However, mortgage rates have longer duration lending terms. Therefore, longer duration U.S. Treasury bond yields have a far greater influence on mortgage interest rates than the FFR.

The Federal Reserve Doesn’t Control Mortgage Rates

After the Federal Reserve slashed its Fed Funds Rate to 0% – 0.25% in 1Q 2020, mortgage rates actually went up because US Treasury bond yields went up by ~0.5%.

The increase came about partly as a result of Congress’ approval of a major spending package aimed at curbing the economic impact of the coronavirus, as well as discussions of a broader, more expensive stimulus package now known as the CARES Act.



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The Triple Benefit Of Paying Off Your Mortgage Early

Updated: 02/22/2023 by Financial Samurai 85 Comments

In 2022, my wife and I paid off our vacation property mortgage after 15 years of ownership. Now that it’s been a while since we paid off the mortgage, I realized there is a triple benefit to paying it off early.

I didn’t realize one of these benefits when we paid off another rental property mortgage early back in 2015. Sure it felt good to pay off our mortgage early. But back then, there was more hesitation since risk asset returns looked relatively more promising.

Instead of writing about the benefits of paying off your mortgage early, I wrote about mortgage payoff fees and procedures. This way, homeowners don’t get blindsided once they do pay off their mortgage and expect everything to automatically handle itself.

In addition, I wrote about the biggest downside to paying off a mortgage early. And that is a fade in motivation to make money.



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Was Getting An ARM Before Inflation And Rates Went Up A Bad Move?

Updated: 09/20/2022 by Financial Samurai 57 Comments

Given inflation and mortgage rates have gone up aggressively since August 2020, was getting an ARM back then a bad move? Maybe. But I’ll argue probably not. Let me reason why.

One of the best things about running Financial Samurai is having readers criticize my financial beliefs and actions. So long as the criticism is respectful, I find the criticism to be one of the best ways to learn. After all, if we’re stuck in an echo chamber, it’s hard to outperform.

Now that we’ve seen big rises in inflation and mortgage rates, I’ve received a couple of comments saying that I was wrong for sticking with my ARM recommendation call. It’s always easier to point out mistakes after the fact.

For reference, I’ve been writing about how an adjustable rate mortgage is preferable to a 30-year fixed rate mortgage since 2009, when the 10-year bond yield was at ~4%. I’ve actually held this belief since 2004, five years before I started Financial Samurai. Today, the 10-year bond yield is at ~2.85% after rebounding from a 0.52% low in 2020.

In other words, my public call to get an ARM and save on mortgage interest expense has been correct for at least 13 years. Could the 14th year in 2022 really be when I finally got my call wrong?

In the world of “what have you done for me lately,” let’s do some analysis!



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Why Pay Off A Negative Real Mortgage Rate When Inflation Is So High

Updated: 12/20/2022 by Financial Samurai 48 Comments

Paying off a mortgage with a negative real interest rate is a suboptimal financial move. However, that’s exactly what I did in this unusually high inflationary environment. Bad move? Maybe.

My mortgage rate was a 30-year fixed at 4.25% and the latest inflation figure was 9.1%. Therefore, it had a negative real mortgage rate of 4.85% (4.25% – 9.1%). I had the mortgage for 15 years until it was recently paid off.

In general, you want to keep your mortgage with a negative real interest rate for as long as possible because inflation is paying down your mortgage for you. However, sometimes, not every financial decision is about maximizing returns.

If you find yourself wondering whether you should also pay down your mortgage balance with a negative real interest rate, let me share with you the reasons why I did.



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Why It’s Better To Pay A Small Mortgage Fee Than Get A Large Credit

Updated: 06/27/2022 by Financial Samurai 13 Comments

Imagine getting a $55,077 mortgage credit rather than paying a mortgage fee to get a new loan. A $55,077 mortgage credit was what I was quoted for a $4.125 million, 10/6 ARM at a 3.625% rate. Surely receiving a large credit is better than paying a mortgage fee right? Not necessarily.

The higher the mortgage rate you are willing to pay, the greater the mortgage credit you receive. The reason is that the lender is making a higher interest rate spread off your loan.

Taking out a new mortgage at a lower 3.375% rate with only a $3,514 credit might be a more optimal decision for a well-qualified borrower. By saving $576 a month in mortgage payments, you will break even in 89 months.

You get 89 months by taking the difference in the credit of $51,563 and dividing it by $576. If you plan to hold the mortgage for longer than seven-and-a-half years, then you will come out ahead all things being equal. If you invest the difference with positive gains, you will break even sooner.

This is the traditional argument for why getting a lower mortgage rate with less credits may be better. However, there is another argument for why paying a small mortgage fee is better than getting a large credit. And I’m not sure most people know this. I didn’t until recently.

Better To Pay A Mortgage Fee Than Get A Large Credit In Most Cases


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Well-Qualified Borrowers Are Paying Much Lower Mortgage Rates

Updated: 09/28/2022 by Financial Samurai 21 Comments

House prices have cooled and will likely decline in some of the hottest markets. However, on my quest to get financing to conquer my real estate FOMO, I realized a positive datapoint for the U.S. housing market. Well-qualified borrowers are paying much lower mortgage rates than the headline rates you see in the news.

There has been a ton of talk about how 5%+ interest rates for 30-year fixed-rate mortgages will really put a squeeze on buyers. If you have to go from paying 3.25% to 6.5% for a new mortgage, I’d believe it. However, I don’t think that’s exactly what’s happening for all borrowers.

Since the 2008-2009 global financial crisis, lenders have become much more strict. At the same time, borrowers have gotten much more qualified. I’ve refinanced multiple mortgages since 2009 and each time was more painful than the last.

Therefore, I doubt home prices will drop too much. A 5-10% decline seems reasonable. But for those cities with a surge in upcoming supply, the price drops could be more severe.



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Mortgages By Interest Rate: Homeowner Tenure To Increase

Updated: 01/24/2023 by Financial Samurai 38 Comments

Let’s take a look at the latest mortgages by interest rate. By understanding the composition of mortgages, we’re better able to understand how a rise in interest rates will affect the housing market and the consumer.

Since November 2018, the vast majority of homeowners with a mortgage have refinanced and taken advantage of lower rates. I’ve drummed this refinancing message since 2009.

In fact, 90%+ of mortgages in America carry an interest rate of less than 5%. Therefore, anybody who is worried about a housing market collapse due to higher mortgage rates shouldn’t be.

Most existing homeowners don’t care that mortgage interest rates are trending higher because their monthly mortgage payments remain unchanged. Further, unless mortgage holders with mortgage rates over 5% are struggling financially, they likely also don’t care either. For if they cared, they would have already refinanced to a much lower rate!

ARMs Are A Small Percentage Of Mortgages

Only about 5% of homeowners with mortgages have an adjustable-rate mortgage as we learned in a previous post. Therefore, this means that 95% of homeowners with 30-year fixed and 15-year fixed mortgages are also unaffected. Just know the percentage of mortgages with ARMs is increasing. The percentage is now closer to 10% given the rise in mortgage rates.

If you are an ARM holder, you might be a bit nervous. However, chances are good that by the time your introductory fixed-rate expires, mortgages rates will have come back down again. After all, we’re in a 40+-year downward interest rate channel. Inflation is proving to be transitory after all.

10-year historical trend line logarithmic chart


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How To Reduce Mortgage Fees And Get The Best Rate Possible

Updated: 06/28/2022 by Financial Samurai 43 Comments

Reduce Mortgage Refinance Fees

This post will show you how to reduce mortgage fees and get the best rate possible. I have been refinancing and taking out new mortgages since 2003. As a result, I’ve become an expert as squeezing as much value as possible out of every mortgage.

Fees are an inevitability. How do you expect anybody to make money without them? I have no problem paying a fee for services rendered. However, some of the fees we pay are often hidden, illogical, or excessive. 

To reduce mortgage fees, let me first explain what mortgage fees entail. I’ll also explain the point system and the incentive based pricing system.



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The Difference Between A 5/1 ARM And 5/5 ARM And When To Get Either

Updated: 06/27/2022 by Financial Samurai 4 Comments

Have you ever wondered what the difference is between a 5/1 ARM and a 5/5 ARM or a 7/1 ARM and a 7/6 ARM and so forth? Let me explain in this article because the difference adds to another dilemma mortgage borrowers should consider.

An adjustable-rate mortgage (ARM) is a home loan with an introductory fixed interest rate upfront, followed by a rate adjustment after that initial period. The introductory fixed interest rate period is signified by the first digit, i.e. 5-year fixed-rate period for a 5/1 ARM.

The fixed-rate period after the initial introductory period is over is signified by the second digit, i.e. 1-year fixed-rate period for the new rate for a 5/1 ARM.

The primary difference between a 5/1 and 5/5 ARM is that the 5/1 ARM adjusts every year after the five-year lock period is over. Whereas a 5/5 ARM adjusts every five years.

Given we know ARMs make up only a tiny portion of total loans, ARMs with an adjustment fixed-rate period of more than one year are even more rare. But let’s discuss anyway.



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Adjustable-Rate Mortgages As A Percentage Of Total Loans: So Low!

Updated: 08/17/2022 by Financial Samurai 51 Comments

Since 2009, I have encouraged Financial Samurai readers to take out an adjustable-rate mortgage instead of a 30-year fixed-rate mortgage. The rationale was that we were in a downward interest rate channel, so why pay more in interest if you don’t have to?

Further, the average homeownership tenure back in 2009 was only around 5-7 years. Therefore, it was illogical to take out a more expensive mortgage for a much longer fixed-rate duration. Today, the average homeownership tenure is 10+ years given the desire for real estate has boomed.

Because I practice what I preach, I’ve taken out multiple adjustable-rate mortgages (ARM) over the past 13 years, thereby saving well over $300,000 in mortgage interest expenses. In fact, my existing primary residence mortgage is a 7/1 ARM at 2.125% taken out in 2020. Score!

However, while all this time I had thought I had been making a difference by helping people save money on their mortgage expenses, it turns out, my message had been ignored and fallen on deaf ears!



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