I’m feeling a little sadistic right now. A large part of me is hoping the equity markets take a big dump again before the end of summer. Bring on the pain baby! I thought I was absolutely done with refinancing my primary residential mortgage in 2010 when I got 3.625% for 5 years. But, I just called my banker on 2/3/2015 and he says I can now get 2.25% jumbo and no points or fees for the same duration! Because I would simply refinance with the same bank, the process would be streamlined since they have all my documentation.
What is this world coming to? Who does that, putting more money in the pockets of consumers who never asked for it? Why save me thousands of dollars a year in interest expense when there’s a guy who’s been out of work for over two years and needs it more? If I do the refi, living in my house will be cheaper than living in a 2 bedroom rental. Something is wrong with how government policies are working. The more the Fed and the Treasury meddle, the more unintended consequences result.
Those with debt are the bad guys right? We’re living in houses we can’t afford to pay in cash, and we refuse to live in crappy rentals whose landlords never do any updating. Debtors are living it up because they can, and know there’s only one life to live. There’s no point making money if you aren’t spending your money. Meanwhile, savers are getting squeezed as their rates head to 0% and their equity investments go down the tubes. Debtors are being rewarded again for living beyond their means and that’s just fine by America and our politicians.
ROLLING THE DICE WITH CHEAP MONEY
I had 2.25% to lock down during the most violent of +/- 400+ point swings, but I got greedy and wanted another 1/4 credit from the bank i.e. they pay me 0.25% X value of my mortgage. The loan officer’s manager wasn’t in, and I decided to wait for her to return so we could get down to business. If the equity markets rally, and the bond markets sell off, rates rise, putting me at risk for even getting my 3.25% locked, let alone getting a 1/4 credit. However, with the amount of volatility in the markets, I figure I’m hedged. If the equity markets go up, great, that’s good for the equity portfolio and the economy. And if not, “Hello juicy refi!”
At “no cost” (costs are just embedded in the rate), I would be saving hundreds of dollars a month for the remaining 5 years of my loans. A 5/1 ARM is the duration I like to borrow on the yield curve, and a time-frame where I can comfortable pay off my loan if necessary. It’s generally a good idea to match fixed duration with the length of time you plan to live in your home. What we all should have been doing over the past 10 years, however, is borrowing at the shortest end possible since rates have done nothing but go down.
With the Fed telegraphing they won’t raise their Fed Funds rates until mid 2013, all of us literally have a green light to borrow at the short end of the curve. For example, those who qualify can get a 1 month floating rate mortgage for only ~1.5%! That is some serious savings, even compared to my 5 year fixed rate of 2.25%. For those who know they plan on selling or paying off their homes at the end of two years, go for it. I plan on owning my house for another 5-10 years, and don’t particularly like the process of refinancing so the 1 month floating loan isn’t for me.
UNDERSTAND THE IMPORTANCE OF BORROWING COSTS & ASSET VALUES
Remember, at today’s 10-year risk free rate of ~1.8% as of 2/3/2015, every $200 decrease in interest expense (or increase in cash flow) is like having an extra $100,000 in the bank. In other words, if you had $100,000 in risk-free US 10-year government bonds, you would generate $2,400 in interest income a year or $200 a month. Or put it another way, if I am a home buyer and it now costs $200/month less to own the same home, I can now afford to finance a house that costs $100,000 more.
Interest rates are a critical element to housing, consumption, and the overall economy. This is a very important concept to understand. The Fed has never before given such clarity in their interest rate policy. I believe it is a good move because when people know what their future borrowing costs are, they tend to spend. It’s the same thing with taxes. A temporary tax decrease does nothing because most people would save for the impending tax increase. No wonder why senior corporate leaders and small business leaders have no desire of hiring people, despite tremendous balance sheets.
Here’s hoping to a 1 hour market meltdown, a locked in refinance during that time frame, and then a recovery! I’m ready! Are you?
Important point: The last time the 10-year yield was at 2.25% was in 2009 when the Dow was under 7,000. The world was ending then. It is amazing to see yields at such levels with the markets 50% higher! In other words, we are much wealthier now and yet, get to borrow money at Armageddon levels. After each of the previous 10-year yield dips, you saw the Dow rally a full year afterward. With the S&P500 yielding 2.4%, I have been buying the markets aggressively close to S&P 1,100 / Dow 10,800-11,000 levels.
Blue line: Dow Jones. Green Line: 10-year Treasury Yield.
Manage Your Finances In One Place: One of the best way to become financially independent and protect yourself is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize your money. Before Personal Capital, I had to log into eight different systems to track 25+ difference accounts (brokerage, multiple banks, 401K, etc) to manage my finances on an Excel spreadsheet. Now, I can just log into Personal Capital to see how all my accounts are doing, including my net worth. I can also see how much I’m spending and saving every month through their cash flow tool.
The best feature is their Portfolio Fee Analyzer, which runs your investment portfolio(s) through its software in a click of a button to see what you are paying. I found out I was paying $1,700 a year in portfolio fees I had no idea I was hemorrhaging! There is no better financial tool online that has helped me more to achieve financial freedom. It only takes a minute to sign up.
Updated for 2018 and beyond.