When there are mortgage market abnormalities, we must take advantage to get the lowest rate and best terms possible.
There were two mortgage abnormalities to learn from in 2021. They were:
1) The average 15-year mortgage rate was way below the average 5/1 ARM and 7/1 AM rate. Therefore, you should take advantage.
2) The average 30-year mortgage rate has been lagging behind while the 10-year bond yield has been going up. Therefore, the 30-year fixed rate mortgage looks very enticing as well.
As a result, if you are looking to refinance your mortgage or are buying a house, get either a 30-year fixed or a 15-year fixed. Both are offering the best value out of all the mortgage products that current exist today.
Credible is my favorite place to refinance a mortgage or get a new mortgage. You’ll get real, no-obligation quotes from competing lenders in minutes. Take advantage of the current mortgage market abnormality!
Don’t Miss Mortgage Abnormalities
With so much euphoria over the opening up of the economy, it’s worth focusing on the 1%.
I’m not talking about the top 1% income-earners in America. Those folks are doing well, as usual. I’m talking about the 10-year bond yield quickly going back to 1%+ and now at ~1.55%. Inflation exceptions are much higher now due to great anticipation of economic growth.
Since August 4, 2020, the 10-year bond yield has been creeping higher. It’s gone from a low of about 0.51% to a high of about 0.85% before the presidential election results. On a percentage change basis, this 67% move higher was massive.
However, during this 67% upward swing in the 10-year bond yield, the average rate on a 30-year fixed mortgage continued to decline to a low of ~2.76% on average. I didn’t write about it at first because I thought it was a temporary glitch in the matrix. However, after more than three months, this abnormality is definitely worth recognizing.
Under normal circumstances, the 30-year fixed mortgage rate should have increased by about 0.25%. Today, the 10-year bond yield has rise by about 1.15% (1.65% – 0.5%). However, the 30-year fixed rate mortgage average has only increased by 0.45% on average. This mortgage anomaly is an opportunity!
Why Did The 30-YR Fixed Rate Decline When Bond Yields Went Up?
The simple answer is that banks were more able to lend once they got through a tremendous refinance backlog and hired more people.
When the pandemic hit, lending standards tightened tremendously. Refinances took weeks or months longer than normal to close.
For example, it took me a couple weeks longer than average to get pre-approved for a mortgage a month after lockdowns began. Meanwhile, I was getting plenty of feedback from readers that their mortgages were taking longer to close too.
At the same time, demand to refinance skyrocketed given rates fell by over 1% in a short time period. Many lenders found themselves short-staffed and began aggressively trying to hire to meet the increased demand.
Lenders Increased Their Spread
To help dampen the volume, lenders also charged a higher spread over an index. For example, instead of charging a mortgage rate 2% above LIBOR, lenders began charging 2.25% or 2.5% above LIBOR.
Banks that found themselves more undermanned than others rationally charged higher mortgage rates. As a result, consumers had to diligently shop around to get the best rate.
Today, lenders have more capacity to handle refinances and purchase loans because demand has subsided and more people are employed to handle the workload.
“Those people who wanted to refinance have already refinanced,” said my mortgage lender. “We’re more focused on purchase loans now,” he continued. As a result, lenders are now charging lower spreads to help boost business once more.
Mortgage Lesson To Learn
The short lesson from this mortgage market abnormality is that mortgage rates don’t always move closely with the 10-year bond yield. Just because the 10-year bond yield is increasing doesn’t mean mortgage rates are also increasing at the same rate.
Just because the 10-year bond yield has spiked higher post election doesn’t mean there aren’t still some good mortgage deals. Well-qualified borrowers are actually getting much lower mortgage rates than the reported averages.
Also, you might find a lender who needs to catch up to its peers because it was overly conservative during the first few months of the pandemic.
You see similar market abnormalities when it comes to savings and CD rates as well. Banks that are trying to boost their deposits will entice savers with higher rates.
Banks that are flush with deposits will offer pitifully low rates as they focus more on lending. As a borrower, you want to borrow from a bank that is flush with deposits.
The Last Mortgage Market Abnormality
Besides mortgage rates going down when the 10-year was going up, the other mortgage market abnormality is the average 15-year fixed mortgage rate is now much lower than the average 5/1 ARM rate.
Based on the latest data from Freddie Mac, the average 15-year fixed rate mortgage is only 2.15% versus the average 5/1 ARM rate of 2.44%. I don’t remember ever seeing such a large spread. The most I’ve seen in the past is a 0.25% difference. Take advantage!
Before 2019, a 5/1 ARM (orange line) was often cheaper because the fixed duration was shorter. The time value of money generally dictates that longer duration loans have higher rates (upward-sloping yield curve).
It’s only during times of great distress when the yield curve tends to flatten or invert. However, at the time of this publication, the yield curve has steepened. We’re past the worst of the recession with economic activity and employment strongly bouncing back.
Further, when I locked in a 7/1 ARM earlier in the year, I was able to get 2.625% before my 0.5% relationship pricing discount (net 2.125%). A 15-year fixed rate mortgage wasn’t even a consideration because my lender was quoting a much higher rate.
Why Is The Average 15-Year Mortgage Rate Lower Than The Average 5/1 ARM?
Given we’re still in times of great uncertainty, banks are being more cautious about the amount of money they lend, the duration of each loan, and who they lend money to. Banks are expecting a wave of foreclosures in the future once rent moratoriums end.
From a bank’s perspective, a 15-year fixed rate mortgage is less risky because the bank gets paid back a larger amount each month in a shorter period of time (15 years versus 30 years).
At the same time, borrower demand for 30-year amortizing loans (30-year FRM and ARMs) is higher because borrowers want maximum flexibility and lower monthly payments during times of uncertainty. With higher borrower demand for 30-year amortizing loans, banks can logically charge higher spreads to earn a higher risk-adjust profit.
Therefore, to entice mortgage borrowers to get a 15-year fixed rate mortgage, banks are willing to charge a lower spread and, therefore, a lower mortgage rate.
15-Year Mortgage Over An ARM?
I’ve long been a proponent of getting an ARM over a 30-year fixed rate mortgage for a variety of reasons. However, with the average 15-year fixed rate mortgage so much lower than the average 5/1 ARM, the 15-year fixed rate now looks very enticing.
If you can get a lower mortgage rate and pay down your mortgage quicker, it’s not a bad idea. This is especially true if you like to regularly pay down extra principal anyway.
I’ve never regretted paying down debt, regardless of how much more I could have returned investing the money elsewhere. The process of paying down debt feels great. Having no debt feels even better.
Before you take a 15-year fixed rate mortgage, just make sure you can comfortably afford the higher mortgage payments due to a shorter amortization period. If your all-in homeownership cost is less than 30% of your monthy gross income, you should be good to go.
The Future Of Mortgage Rates
With the Fed expect to raise the Fed Funds rate twice in 2022 to combat inflation, you would think mortgage rates will be going up. However, the bond market determines mortgage rates and I say mortgage rates continue to stay depressed for years.
We are in a goldilocks situation with rising stock prices, low rates, and rising real estate prices. Further, the FHFA increased the conforming loan limits in 2022 by 18%. Mortgages should continue to be very affordable in the near future.
If you can break even on a mortgage refinance before you sell your home, you should do so. My general guideline is to refinance if you can break even within 18 months or less. I prefer “no-cost refinances” because you get to break even immediately, even though you’re paying a slightly higher rate.
In terms of when to buy property, I always like hunting for property during the winter. Any property listed close-to or during the holidays generally means the seller is more motivated. Real estate agents like to say that listing during the winter means less competition. However, this is more of the real estate agents’ way of trying to generate more steady business throughout the year.
Check the latest mortgage rates with Credible, my favorite online lending marketplace where qualified lenders compete for your business. Lenders will give you a free, no-obligation rate quote. Also call or e-mail your existing bank and see what they have to offer.
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Dave Eric says
Got a mortgage even though house was paid off – nothing like being able to short the dollar and be paid for it by investing in income related investments that pay higher (no I don’t advise for anyone else – review your own personal situation.) – otherwise known as a carry trade.
Private Bank also willing to give me 7 year fixed rate at 2.25% personal loan.
Crazy how cheap money is….use leverage wisely is all I will say. Don’t borrow what u can’t pay back…..
Hello, love the site. I am looking to refinance a jumbo loan on an investment property in california which is currently rented out. We were initially living there as a primary residence and our mortage is a 30 year fixed with a current balance of $780,000 at 3.875%. The property is a single family home with zillow/redfin estimate around $1.2M. I simply cannot find any bank which is willing to refinance a jumbo loan on an investment property. We have excellent credit and income/debt ratio is not an issue, the banks are just saying they aren’t offering. Would greatly appreciate any referrals or suggestions on banks to refinance a jumbo loan on an investment property.
Robert Ruschak says
“Goldman Sachs, for example, is incredibly bullish on the future. My old firm has a 3,700 S&P 500 year-end target for 2020 and a 4,300 year-end target for 2021. 4,300 is roughly 20% higher from current levels. JP Morgan has a year-end 2021 S&P 500 price target of 4,500.”
Should investors be concerned with the S&P 500 P/E ratio at 37 plus?
Financial Samurai says
Yes. Good to always be concerned and to invest based on your risk profile.
I am curious to get your thoughts on whether I should pay off my mortgage given my situation. If you are interested in a case study please let me know
Financial Samurai says
Sure, feel free to share. I’ve never regretted paying off a mortgage and the process of paying extra principal.
Chase offered to adjust my interest rate for $995 without any refinance headache.
I have a jumbo loan with Chase at 3.25% that was refinanced earlier this year (it was a huge pain due to delays from chase). I called to refinance and was quoted 2.75% (If you have 250K worth of investments with them, which not sure I wanted to do.) and would require my house to appraise at the high end of what I think it would (in order to have it under 60% Loan to value), the closing costs were $3,300. If it didn’t meet the 60% loan to value it would be 2.865%.
After submitting my application, Chase offered to adjust my mortgage to 3% keeping the same terms with a $995 fee. It would be effective immediately without moving 250K worth of investments or the headache to refinance/appraisal.
I am not sure my house would appraise and if it didn’t, it would take 30 months to pay for itself (the different between 3% vs 2.875%)….We signed the 3% with 995 fee, I was on the fence.
Financial Samurai says
It’s nice to go the simple route often times. My refinance in 2019 took almost 4 months. That was a pain.
New purchase loan in 2020 was about 45 days, after already getting preapproved. I actually dragged it over a longer period bc I wanted more time.
How’s the 20-year fixed compare? Does that follow the same anomalies as the 30 and 15 year fixed? We bought our house 10 years ago.. and I don’t really want to pay extra for a 15 year and definitely don’t want to reset back to a 30 year and pay extra interest.
Financial Samurai says
How would you pay extra for a 15-year if the rates are likely lower than your current mortgage rate?
Paying a larger monthly payment is par for the course for a 15-year. You can get a 30-year and just paying extra principal to get the amortization schedule to match your existing one.
I recently refinanced to a 20-year in FEB 2020. At the time, it was a lower rate than the 30 year, but not as big of a payment commitment as a 15 year so it was a sweet spot for me. From what I’ve seen with a broker you can request any term you like.. I guess I could request a 19-year fixed this go around if I wanted. I was just asking whether or not those non-traditional fixed term lengths make a difference in terms of the “anomalies” your were speaking of. Or if it’s best to stick to the traditional term length of 30 and 15 year to get the best rate terms.
Jason ORourke says
there’s a lot more competition for the ‘normal’ rates: 30, 15, and to less of a degree the 10 and 20. When I’ve shopped for those in the last year, I don’t see a compelling reason to make it the target, though it never hurts to ask when you find an attractive lender.
As Sam said, taking on a new 30 doesn’t mean paying extra interest. If you keep paying to match the interest on your existing schedule, it ends on the original 30 year term. In my case, I refi’d 3 times since buying my home 2.5 years ago. Each new 30 was 50 basis points lower, reducing the monthly by $500. By continuing to pay that as extra principal, I didn’t add time or interest and instead effectively created a ~27 year mortgage due to the lower interest rate.
But if your 30 fixed is 2.625 like mine, or 2.75 or heck, even 3, you have to decide if you want to prepay and earn the 3%, or if you’d rather deploy that capital elsewhere.
The really weird bit is seeing ARMs priced higher than jumbo 30s…
Peter Kovacs says
The low rates are very tempting, I’m wondering if it’s worth using cash reserves to pay down a Jumbo loan to make it conforming so the lower rates available.
We have a Mortgage + Heloc combined rate of around 4.2 in the SF Bay Area. We’d need to spend around 180k to get it within the conforming loan limit.
We are torn between paying it down and locking in a lower rate or investing the money elsewhere (funds, stocks, another real estate).
I’d be very grateful for some advice and pointers on how to make this choice. Thank you.
Financial Samurai says
What is the new lower rate for a conforming? You can calculate the rate of return on the $180K by dividing it by you interest savings.
Read this post: https://www.financialsamurai.com/should-i-pay-down-extra-principal-to-qualify-for-a-mortgage-refinance/
It has the calculations.
Hey Peter, I was in the same situation, but with 2021 the threshold for jumbo loans went up around $50k in my county. You should check what the new 2021 Super Confirming limit is for your county. It will decrease your out of pocket to pay down to be in conforming loan..
Evie D says
Refinanced (no-fee/no-points) at the end of March from a 30-year @ 3.625% mortgage down to 3.25%. Just closed on another 30-year no-fee/no-points refinance for 2.75%. My mortgage went from $2,162 at the beginning of 2020 to $1,776. I live in Orange County, CA.
In addition to saving $386 a month, refinancing also “freed up” $2,316 from my 6-month emergency fund, which was very useful given that I had several things unexpectedly break this year.
Here’s a big thing I realized: Assuming no prepayments, my original 30-year @ 3.625% mortgage that was $2,162/mo would have been paid off in November 2046. With my new rate, I could prepay $386/mo so I still pay $2,162/mo and the loan will be paid off in May of 2043. That’s 2.5 years sooner for the same exact monthly payment as before.
This might be a useful way to think of things if you are on the fence about refinancing.
We own our home and, many times over the past decade, have considered the merits of getting a low interest mortgage and reinvesting the money. But the peace of mind of not having a mortgage is worth a lot, even if the property taxes are high enough that you can never really consider it secure.
Closed on a new home in August and doubled our square footage. It feels great to spread out with four children and a spouse that now works from home. I think our new mortgage was called a high-conforming loan. The mortgage loan was between a conventional and jumbo loan sizes. We debated putting more money down to qualify for the the conventional loan but there wasn’t much difference in the rate and we like the returns in the market. We feel like we won the lottery with a 30 year 2.79% loan.
I suspect fixed rates are getting close to equal with variable rates because banks are also expecting mortgage rates to be low for a very long time and thus they aren’t expecting much gain on the variable rates in the future.
Jeff VA says
I refinanced earlier this year, but the current rates are making it make sense to refinance yet again. The only saving grace is that my lender offers a no cost refinance (I only have to pay for taxes, interest, impound) to re-set the account, but I think I’ll wait couple of more months to see if the rates drop even more.
At this point, maybe I’ll go with the 15-yr option. Low 2s sounds so bizarre/enticing.
Btw, on this part of your post:
“The hit parade of positive vaccine news could cause for risk appetite to increase. Our government might get its act together and pass a new stimulus bill. If so, investors may sell risk-free treasury bonds, causing mortgage rates to go up further.”
I think the second stimulus will 100% get passed. I don’t know if the amount will be less than 1 trillion or more than 2 trillion, but what are your thoughts on hoarding some tickers like TLT or even buying calls?
Financial Samurai says
As of now, there is radio silence on the 2nd stimulus. This is a great demonstration of how politicians are heavily focused on themselves and getting/maintaining power than of the people.
Any stimulus passed before year-end will likely be seen as a bonus, and a boon for the Santa Claus rally that I think will ensue.
I actually bought about $30K of TLT and IEF the day the 10-year bond yields surged to 0.97%. It was more a, put cash to work, but don’t want to chase momentum trade.
Jeff VA says
Gotcha. Looks like TLT’s yield is at least 2x what “high yield” saving accounts are offering so seems like a solid way to put cash to work.
Btw please keep all of us posted on your newsletter idea. I think you mentioned $10/month? I’d definitely subscribe to get some ideas on putting cash to work. Thankfully during the pandemic, I was able to to save some cash (no day care cost for my LO, less eating out, less going out, etc.) so I will be considering this my “fun” money to make riskier plays that I wouldn’t have entertained in the past. Normally I would’ve bought some TLT stocks to hold LT, but I’m leaning on buying some LEAP calls just to see it play out.
Financial Samurai says
Sure, will do. I just don’t know whether I want to make another commitment to writing a paid newsletter. Although, I already do regularly write one already.
TLT is much more volatile than IEF.
Will it still be a good time to buy rental properties in winter ? Since it’s hard to find renters during holiday season. It may means you will lose rent for a few months.
I have a 1.5 year old mortgage with 3.75 30/fixed rate (great at the time), and am considering whether to defer a year of payments on the end, but it is nearly impossible to find out how that may impact refinancing in the future (I could pay the current forbearance amount, but would rather invest. (Great idea for an article!)
My other question is if I should just refinance to the lowest fixed 30 year or get a lower year refinance at the same payment I’m making now to pay off sooner. I just want to buy as much property as I can get lending for (my current home is rented out with roommates), so I’m leaning toward extending the loan further and reducing payments to help qualify for future loans. However, I love the idea of being able to pay it off sooner. Any advice?
Easily Drop a point with a refinance – definitely do it… the cash flow will help with your other plans as well. Plus you can always pay more or equal to current and get that interest down.
Jack @ Turtle PF says
Great post. I never seriously considered 5/1 ARM over a 30 year fixed but I am starting to change my mind after reading your post. Do you think it is still a good idea to get a 5/1 ARM over a 30 year fixed given that the starting interest rates are about the same right now?
We refinanced our primary home and cabin twice this year. First decided to pull some cash out of the cabin – though rate still went down from 3.75% to 3.5%. Then refinanced the cabin again last month to 2.5% on 30 year fixed. For our primary we went from 3.125% on a 5/1 ARM to a 30 year fixed at the same rate, then went down to 2.25% last month on a 15 year fixed.
I’m also a fan of doing no-cost refinances. In fact, on each of our refinances this year, we took a lender credit large enough that actually resulted in us having more equity from each refinance.
I’ve found the best rates from lenders by searching Zillow.
Would you mind sharing the lender information? I’ve been searching but couldn’t find a lender with the great rate like that. Thank you.
Just signed for a new 30 year at 2.37% today. 1 point. Break even is a bit longer than your recommendation at 28 months. However, the loan was only 6 months old, as I had closed at 3.6% right before Covid hit. Seeing as Ill be here a minimum of 8 years, seemed way to good pass up.
2.375 10/1ARM jumbo including discount for bringing money to the bank
Which lender if you don’t mind sharing?
Finalized the sale of our current home and traded up to a new home on Oct 20th. Locked in at 2.5% 30 year fixed. More room for the family as the lockdown has all three of my teenager daughters online for school as well as my wife, who is a 3rd grade teacher, teaching from home. No idea if we’ll downsize 5-10 years from now when my kids are all grown and on their own, or pay the mortgage off early, but 2.5 on a 30 year fixed was/is bizarre feeling.
Financial Samurai says
Congrats! Good to live in a larger, more comfortable home during a pandemic isn’t it? 2.5% for a 30 year fixed is fantastic.
I refinanced at the start of the COVID scares. I took a jump from 3.5 down to 3.0, perhaps I should have waited longer. I actually just sold my house (a couple months after the break even point). So, overall a win-win I guess.
I think for me on a refinance the key is to maximize the delta in the new payment from the old. In my case, I dropped a bit over $700/month. The amount isn’t all that significant, but the perceived cash flow felt nice. Since I was used to paying the higher rate for the last 5 years, the delta went right into investments account, and 529 plans. Granted in this refinance the period was shorter than I normally go before a sale, but the idea is the same. Make sure to maximize the benefit of the delta.
The good news is I’m now shopping for a new house in a different state, and with rates so low I don’t feel as bad going higher on the house budget, but still trying to follow the 30/30/3 idea. However, with the interest is so cheap, maybe look a bit larger than needed. Another lockdown might be coming after all, better to get the space while you can. Working from home with 2 kids under 4 was a challenge this last time.
I love how I always learn something new when I read your articles. I had no idea there were abnormalities happening with mortgage rates right now before reading this post. Thanks for the market insights. Very informative!
Ben E says
I’m at a 2.875 15-year rate with 12 years left owing $142,500. I’m being quoted 2.25% on a 10-year. Factoring in the closing costs the math shows that I can still save about 8k in interest over the life of the loan. But it’s odd b/c I contacted three brokers and only one said that it would make sense. Am I missing something? It’s not a huge jump compared to most folks, but it looks like I’m right on the bubble. Congrats to those dropping over a point on big mortgages.
Jason ORourke says
Ben, just paying paying an extra $200/month you reduce a 12 year term down to 10 without paying anything. At your balance, it’s hard to make up for the refi costs, and the lender isn’t able to offer a no cost rate that would attract you.
12 years at 2.875
1171/ 26.2k in interest
10 years at 2.875
1368/ 21.6k in interest
10 years at 2.25
1327/ 16.8k in interest + cost of refi
I’ve generally found refis to cost about 3.5-5k. At the high end of the range, there would be virtually no savings over just making your own 10 year based on the existing rate. And worse, if for some reason you choose to sell before then, you’d have lost money making the move.
There is a great graph from bloomberg terminal of the 10YT vs. 30 Year mortgage spread that you should look at or google “30-Year Fixed Rate Mortgage Average in the United States-10-Year Treasury Constant Maturity Rate” and go to the FRED website (Federal Reserve Bank of St. Louis) You’ll see the spread gapped out due to pandemic so that when even the 10 yr dropped, rates didn’t drop below 2.75%+-. This spread during the beginning of the pandemic was historically large when comparing to prior years due to tail risk of lending in a recession. As things have normalized, the spread has tightened back closer to historical standards (1.5%-2%) given that banks are less worried now than they were say 6 months ago. Anyway it would be worthwhile to add into this article and check out. Thanks,
Bill Business says
Refinanced a fixed 30 year from 3.875% to 2.69% last month (no points). Immediately pays for itself and hopefully the money I’m saving and putting in the S&P 500 reaches those targets from your old firm.
I got a 10 year at 2.25% last week. Almost went for the 15 but had already paid some off a previous 15 year and didn’t want to extend my payoff date. It’s a good time to be a borrower.
I got 5/5 arm 30 year jumbo loan for 2.5% in September. Hopeing rates stay low for another 5 years? Otherwise will find an opportunity to refinance into 15 year fixed if rates can go even lower.
Interestingly, in my credit union, 15 yr fixed is a tad higher than 5/1 and 5/5 arm 30 year. You are right that every bank is different.
Financial Samurai says
A 5/5 jumbo ARM for only 2.5% is CHEAP! Nice work. Gotta love that it only adjusts every 5 years. I’m confident rates will stay low for our lifetimes.
15-year fixed rates should be lower than ARMs… so this data is surprising to me.
I also closed on a jumbo 5/5 refi at 2.5 percent in sept. Interestingly the credit union was also offering a cash out jumbo 5/5 refi also at 2.5 percent
Does anyone know what lenders have refin program on jumbo loan investment property? I have shopped around but can’t find a lender allow refinancing investment property with loan amount over $765k.
I have a 2.75% 5/1 that due to reset beginning next June. Right now it looks like it will reset to 2.65%. Before Covid-19 I was planning on re-upping another 5/1, then Covid-19 had me thinking 15. Now I’m already resetting lower and will probably need to get a bigger house in the next 3 years, so every month that passes the benefit of refinancing gets lower and lower. Sometimes doing nothing is and being patient is better than acting.