I just rented out my primary residence this summer at a rent that’s almost double all my costs because I’ve lived there for 10 years ($9,000 a month rent in 2016 versus $4,300 a month mortgage). But banks still quoted me for mortgage rates at least 25 basis points higher than the primary mortgage I took out for my new home. As a result, I kept my 2.625% 5/1 ARM mortgage with three years left on the fixed term.
Between 2H2018 and 1H2019, something funny happened. The Federal Reserve was raising their Fed Funds rate, yet mortgage rates kept on falling. This article explains why this happened. Hint: The Fed is not always right.
Despite the Fed raising interest rates methodically since late 2015, mortgage rates have actually gone nowhere during this time period.
First, let’s look at the Fed Funds rate chart since end of 2015. The hikes have been steady and quite steep based on where we came from.
Now let’s look at various mortgage rate terms since 2015. Notice how the average mortgage rates for a 30-year fixed, 5/1 ARM and 15-year fixed are all back to where they were at the end of 2015.
Why aren’t mortgage rates increasing along with the rise in the Fed Funds rate?
The simple answer is that the Fed does not control mortgage rates. The bond market via bond investors do.
The Federal Reserve sets the overnight lending rate (Fed funds rate), which determines how expensive it is for banks to lend money to each other on overnight transactions.
This short-term rate helps determine money market rates, checking account rates, short-term CD rates, and even egregious credit card rates. For example, you can now get a healthy 1.75% money market rate whereas back in 2015, the best you could do was around 0.25%.
Mortgage rates, on the other hand, are influenced by the 10-year US Treasury bond, which is determined by the market, not the Fed.
Mortgage rates are back down to ALL-TIME lows in 2020 thanks to the coronavirus. Take advantage by refinancing your mortgage today with Credible, one of the largest mortgage lending marketplaces that allows you to compare multiple rates and lenders.
Good news! After almost four months, my latest mortgage refinance to 2.375% from 2.625% for a 5/1 jumbo ARM is now done! What used to take 30 – 60 days to refinance a mortgage pre-crisis now regularly takes three months or more due to increased scrutiny by lenders. Higher lending standards is one of the main reasons why I don’t think there will be a housing correction as painful as we had in 2007-2010.
New readers may not know, but in 2015 I failed at my initial attempt to refinance my 5/1 jumbo ARM in its fourth year. The main reason for failure was I didn’t have two full years of consulting income under my belt. For any of you who are freelancers, even if you make $1,000,000 in 1.9 years, the banks will not count any of it during their underwriting calculations until you get past year two.
For those of you thinking about leaving your day job and becoming a rockstar freelancer, please refinance before leaving your job. Once you no longer have W2 income, you become dead to banks. Thank goodness rates came down again in 2016 and I did not give up! In this post, I’d like to share the factors that allowed for a successful refinance. Maybe it will encourage you to refinance or never give up if you’re in the process too.
Back in 2000, many investors were cocky, much like investors today with the stock market at record highs in 2020.
I remember asking my Director at the time what he thought about the concept of the mortgage as a forced savings account? At the time, as an investor, it appeared he could do no wrong.
He said, “I don’t need no forced savings account. Only irresponsible people who don’t have the discipline to save every month would consider their mortgage as savings. I’d rather have as big of a mortgage as possible so I can make money in the stock market!”
My Director ended up losing millions when the dotcom bubble collapsed. He no longer looked down on people who slowly grew their wealth. At least, unlike most people, he had millions to lose!
If you have a traditional mortgage that pays down principal and interest, the mortgage “forces” you to save because you are forced to pay your mortgage every month if you want to keep your property. A percentage of each mortgage payment goes towards principal, which can be considered savings.
I’m also in the camp that it’s better for most people to receive a tax refund, even though it’s like giving the government an interest free loan, because most people can’t save for crap!
Refinancing your mortgage in 2020 and beyond is a no brainer because interest rates are back down to six-year lows. Check out Credible, one of the largest mortgage lending marketplaces that allows you to compare multiple real rates and lenders in one place.
To no surprise, my 5/1 jumbo ARM refinance has run into a snafu. For those who don’t know, I’m trying to refinance a 2.625% 5/1 ARM in its 5th year into another 5/1 ARM at 2.375%. If I let the ARM adjust after the 5th year, it may adjust to 3.375% or higher since the rate is based off LIBOR + a 2% margin. Everybody who has an ARM close to adjusting needs to refinance.
The mortgage amount is $981,000 and I’m currently paying $4,338 a month. Roughly $2,192 of the $4,338 monthly mortgage payment goes to principal. If I were to successfully refinance to a 2.375% rate, my monthly payment would fall to $3,830 a month, and $1,900 of the payment would go to principal. In other words, my cash flow increases by $508 a month, but my monthly principal payment goes down by $292 a month.
I enjoy paying down principal every month because it’s like a forced savings account. My goal is to pay off the entire mortgage by age 50 (2027), or 22 years after I first took the sucker out. Once a mortgage is paid off, there’s only one figure needed to calculate your net worth: the market value of the property.
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. I’m currently locked into a 5/1 jumbo ARM at a juicy 2.35% with 0 points and around $3,100 in fees, which is at least 0.15% lower than anywhere else I’ve found.
In this article, I’ll show you how you can pay the lowest mortgage fees possible while also getting a great interest rate as well. You will understand what mortgage fees entail, the point system, and the incentive based pricing system.
Refinancing your mortgage in 2020 and beyond is a no brainer because interest rates are back down to ALL-TIME lows. Investors have fled to the safety of bonds due to coronavirus fears, which means bond yields have crashed. Check out Credible, one of the largest mortgage lending marketplaces that allows you to compare multiple real rates and lenders in one place.
As a homeowner or a potential homeowner, now is the time to pounce on lower rates and either refinance or look for a new home.
Being mortgage free is generally a good thing. But there are times when you want to accelerate your mortgage pay down and there are other times when you want to leave it well alone.
With the aggressive spike in interest rates post election, it’s now time to reassess whether paying down your mortgage quicker is a good idea.
Borrowers who took on debt and locked in a lower rate before the election are winning. Banks who lent people money before the election are losing because they could be earning a higher return today. In other words, the VALUE of the mortgage has risen for borrowers and declined for lenders.
When something rises in value, you do your best to hold on for as long as possible. Therefore, paying down your mortgage faster when your interest rate is fixed is a suboptimal move.
Here’s an example of a $500,000 mortgage that demonstrates this point.
5-Year ARM Interest Rate Lock Before Election: 2.5% = $1,975/month
5-Year ARM Interest Rate After Election: 3.25% = $2,176/month
Instead of prepaying down a fixed 2.5% rate, when the best a borrower can now get post election is 3.25% for the same loan, save the difference. The most conservative strategy is to save the $201 monthly difference for 60 months and then pay down $12,060 in principal the last month the 5-Year ARM adjusts if you plan to refinance or let the mortgage adjust. If you plan to sell the property by then, you’ll just keep the change.
A more aggressive strategy is to invest the $201 monthly difference in some now higher yielding bonds, given they have sold off due to the interest rate increase. An even more aggressive move is to invest the $201 monthly difference in a mix of stocks and bonds. Finally, the most aggressive strategy for a lot of people is to invest 100% of the difference in stocks and hope the raging bull market continues.
Your decision will depend on your risk tolerance and financial goals. For those of you wondering about 30-year fixed rates, they’ve risen from around 3.625% to 4.125% post election.
This post is dedicated to those who refuse to welch on their mortgage debt, even if they bought at the wrong time or got into a high interest rate mortgage that cannot be refinanced. I know your pain and frustration.
I’ve got a confession. I’ve been reluctant to pay down my 4.25%, 30-year fixed vacation property mortgage because it makes me face the truth that I bought a two bedroom, two bathroom vacation property at an inopportune time. Instead of attacking the bad mortgage with laser focus, I wanted to forget all about it.
I’ve been so reluctant to pay down the principal that I paid down my 3.375% rental property mortgage in 2015 instead. Illogical right? My rationale was the following:
1) I already did something positive. The vacation property mortgage was originally a 30-year fixed at 5.875%. Back in 2007, that was considered OK. In December 2012, after not turning in the keys like so many people did during the financial crisis, Bank of America contacted me for a free loan modification down to 4.25% with the same payoff schedule. It was like a reward for being good! I’m sure the Justice Department fining BoA $10B+ had something to do with it too. I had been trying to refinance the loan for years, but couldn’t because I was current. Curiously, only those who were delinquent could get some reprieve. The loan modification lowered my total payment from ~$3,200 to $2,497. Score!
2) Not 100% sure of keeping the property. My Lake Tahoe property ranks last in importance in my real estate portfolio. Most vacation properties do. If the world was going to end again, the vacation property would be first to go if I had no more money. In such an impending scenario, it would be unwise to pay down extra principal. I knew with 100% certainty that I would never foreclose or short-sale my properties in San Francisco because they are way in the money and highly cash flow positive. After such a strong recovery with much more stringent lending standards, I’m confident we will not go back to hell.
3) Investment opportunities. After the financial crisis, I felt it was time to invest more rather than pay down more debt. My net worth was rocked by ~35% and in order to get back to even or reach new heights, I felt strongly the need to put more capital to work. As a result, I’ve been investing six figures a year since 2009. I also put down $248,000 for a fixer upper in early 2014 and spent another ~$170,000 on home improvements. Only in 2015 did I decide to aggressively save cash and pay down my other rental property mortgage because I couldn’t find as many attractive investment opportunities. Besides, the 2/2 condo mortgage in SF was supposed to have been paid down by 2013.
In the past, I used to be perturbed by how long it took to refinance a mortgage. The whole process almost got derailed on its 97th day due to a bad credit report unbeknownst to me. Luckily, the refinance eventually went through.
What used to take most people 30 days to refinance, now often takes 3+ months to finish. I’m much more zen today. So long as it eventually closes, I don’t mind if my refinance takes forever. Well, not really forever. But as long as the bank wants, so long as I’m not paying extra fees.
Let me share with you the main reasons why having a long mortgage refinance process is actually a wonderful thing, especially for those who have Adjustable Rate Mortgages or are looking to refinance into an Adjustable Rate Mortgage.