Have you ever heard of a zero percent mortgage? Getting a zero percent is likely impossible, unless we are in a significant deflationary environment. You can have a negative real interest rate mortgage in a high inflationary environment.
However, getting to live for free, which is what a zero percent mortage means, is possible. Let me explain.
A Free Zero Percent Mortgage
Here is an example of how I was able to live for free for a couple of years. This is essentially like getting a zero percent mortgage.
After shopping around for various mortgage refinance rates when the 10-year bond yield collapsed to 1.6%, I locked in a 5/1 ARM at 2.375% with -0.125 points compared to my existing 2.625% rate. If my ARM resets today, my ARM would jump to 3.4% due to LIBOR, which is what I’m really hedging against by refinancing now.
A 2.375% 5/1 ARM essentially means I have a mortgage that is basically FREE every month because I can invest my money in a 12-month CD for 2.5%. In 2022, you can actually buy a 10-year Treasury bond yielding 2.8% now.
For example, with a $1M mortgage, I’m paying $23,750 a year in interest but would earn $24,200 a year in interest if I locked in a 5-year CD with the same principal borrowing amount today. In other words, my effective mortgage interest rate is negative.
Not everybody will have the capital to conduct such an arbitrage. That’s fine as it takes time to save a bed of cash. What’s more important as a borrower is to RECOGNIZE the existing arbitrage so that at the very least, you know you are getting a fantastic deal when such dislocations occur.
Terms Of An Adjustable Rate Mortgage
The below chart is a snapshot of my actual Adjustable Rate Mortgage (ARM) terms.
This 5/1 ARM is tied to the one year LIBOR rate + a margin of 2.25%. At a total interest rate of 2.375% for the first five years, the bank only makes a margin of about 1.24% above LIBOR. The initial fixed rate periods of an ARM (1,3,5,7,10) are subsidized rates, which you should take advantage of before the ARM adjusts.
It’s similar to using a credit card to buy things for a 30-day interest free loan, just not as bad if you don’t pay your bill because credit card interest rates are usuriously high, while ARM mortgage rates are capped.
In the sixth year, the bank can raise my interest rate by as much as 2% to 4.375% fixed for the rest of the year, if LIBOR rises to 2.125%. My interest rate can rise by another 2% to 6.375% in year seven if LIBOR rises to 4.125%.
The maximum interest rate the bank can charge me is 7.375% starting in year 8 – 30, which is equivalent to LIBOR at 5.125% (5.125% + 2.25% margin = 7.375%).
ARM Is My Favorite Type Of Mortgage
As an ARM holder, you’ve really got to take a view on where short term interest rates (LIBOR, Fed Funds rate) and long term interest rates (10-year bond yield) are heading.
With evidence of deflation around the world, I do not see Central Bankers raising their overnight borrowing rates aggressively. Perhaps LIBOR could rise from 1.14% today to 2.125% in five years, but that would indicate healthy inflation, which would also portend to a healthy increase in property values. A mortgage interest rate of 4.375% is not that much at all.
Besides my belief that interest rates will continue to stay low for longer, another reason why I’m very sanguine about refinancing into another ARM is because in five years, my principal will be about 12% less if I don’t pay down extra principal. Therefore, I’ve got another buffer if rates do rise.
Why So Many Different Mortgage Rates?
The reason different financial institutions have different CD and deposit interest rates is because financial institutions all have different capital needs. Banks make money by attracting deposits, paying an interest rate on those deposits, and lending your money at a higher interest rate to make a spread.
My 2.375% 5/1 ARM is with Citibank. But when I go to see Citibank’s 5-year CD interest rate page, they show only 0.5%. This means Citibank is flush with cash and is in no need to attract more capital. They are probably over-capitalized and need to find ways to deploy their deposits to boost their earnings.
If you are a financial sector investor, an easy due diligence is to simply check the latest deposit and CD rates of various financial institutions. The higher the financial institution is paying, perhaps the more balance sheet risk there is. For example, before Washington Mutual got acquired for pennies on the dollar, they were offering 4-4.5%, 5-year CD rates even though the overall market averaged closer to 2%.
Now, the best CD rate is about 2% in 2022. Buying Treasury bonds today is a great way for homeowners to live for free as well. Treasury bonds are paying 2.8%, which is higher than many refinanced mortgages now.
Zero Percent Mortgage To Live For Fre
Your mission as a Financial Samurai is to BORROW from over-capitalized banks and LEND to under-capitalized banks.
Whenever you see CD interest rates pay more than mortgage rates with the same duration, you must take action by refinancing your debt. There’s no clearer sign that you are getting the best mortgage rate possible at the time.
With rates this low now, I wouldn’t be in a rush to pay down your mortgage unless you have tremendous excess liquidity or debt levels far beyond a comfortable level. Develop a system where a percentage of each dollar is used to build your risk-free fund, invest in the stock market, and pay down your highest interest rate debts.
With my latest mortgage refinance, I plan to live in my house mortgage payment fee by tethering my CD interest income of ~3% towards my new mortgage interest rate of 2.375%. Who said living in a city like San Francisco is expensive?
If you can wipe away your living costs, you can now free up a tremendous amount of cash flow to invest or do whatever your big heart desires. Now I’ve got to figure out how to eat well for free. Any suggestions?
Wealth Building Recommendations
1) Invest in real estate surgically.
Due to effectively zero percent mortgages, real estate is going to be strong. If you don’t have the downpayment to buy a property, don’t want to deal with the hassle of managing real estate, or don’t want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.
Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you’re looking for strictly investing income returns.
Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer. It’s free to look. I’ve personally invested $810,000 in a private real estate fund to take advantage of lower valuations in the heartland of America.
2) Refinance your mortgage.
Shop around for the latest mortgage rate. Check the latest mortgage rates online. You’ll get real quotes from pre-vetted, qualified lenders in under three minutes. The more free mortgage rate quotes you can get, the better. This way, you feel confident knowing you’re getting the lowest rate for your situation. Further, you can make lenders compete for your business.
A Zero Percent Mortgage To Live For Free is the best! It really is awesome homeowners have been able to take advantage of negative real mortgage rates since the pandemic began. Not only are homeowners living for free, homeowners are getting paid to live due to negative rates and real estate price appreciate. I believe the housing market will continue to stay strong.