There are two things I love about personal finance: 1) Making money and 2) Saving money. Both require effort, which is one of the key themes on this site. Money isn’t just going to start falling from the sky. You’ve got to work harder than everyone else, come up with better ideas than everyone else, and produce more than everyone else to make more than everyone else.
The great thing about making money is that it is often NOT a zero sum game. You making more doesn’t mean someone makes less. The pie is enormous and there is no monopoly on becoming rich!
The perpetual decline in mortgage interest rates has been an absolute boon for many. Anybody with a loan-to-value ratio of 80% or lower should be able to lower their mortgage rates quite dramatically. With a full 30% of my net worth invested in real estate, I’m maximizing the ideal mortgage amount to shield myself from taxes and keep the perpetual cash flow going once I’ve lost all energy and desire to make money on my own.
My interest payment on my primary home mortgage has literally gone down by 50% since first buying my primary house eight years ago (~5.5% to 2.625% interest rate). Meanwhile, the house value has realistically increased by roughly 10%-13% thanks to a flood of innovation and jobs in the Bay Area. During the bubble, the house was probably up by as much as 25%, but alas, those ridiculous valuations were unsustainable.
Reducing debt doesn’t take as much effort as making more money. That said, reducing debt does necessitate action. The only debt I have is mortgage debt, because years ago I paid off my student loans from business school and I never carry a revolving credit card balance. Right when Bear Sterns blew up in 1H2008, I became acutely aware of my mortgage debts across three different properties and the risks of not managing such debt properly.
MY MORTGAGE REFINANCE HISTORY
Making more money was straightforward from 1999-2009 because I was going through the growth phase of my career. If I was just an average worker and survived for 10 years, I would see a steady pay increase. This is the case for almost everybody I know.
Saving money was also straightforward. Ever since my first job in NYC, I decided to save 50%+ of my after tax paycheck because I didn’t expect to survive for long in finance. A 50%+ savings rate was therefore automatic and required no action after the first year.
What did require action and lots of patience was refinancing my largest debt, my primary home mortgage. I would have been perfectly happy with my initial mortgage until I realized what the Fed was up to.
2004: New house purchase. 30-Year Fixed at 5.5%. Soon I realized how stupid it was to pay 5.5% for a mortgage when there were much cheaper rates out there. I am a big advocate of borrowing at a 5-year adjustable rate mortgage over a 30-year fixed. The article goes into detail as to why.
2005: Mortgage refinanced to a 1-month Option Arm at 1.25%. Went from one extreme to another. My payments got slashed by more than 70% and I was loving it! The 1 month loan followed LIBOR. I wish these loans were available to all again instead of just Mark Zuckerberg, who I don’t understand why he has a mortgage at all.
2007: The economy and the stock market are on fire and rates are inching back up. I feared having a mortgage rate based on a 1 month index like LIBOR could really screw me over if inflation started rising. As a result, I refinance to a 5/1 ARM at 4.125%. At the time, I was paying an interest rate of around 3.5%. What a big mistake!
2009: The world is now ending and 5/1 ARMs have fallen to 3.625%. I immediately jumped on this refinance since 3.625% was a nice 0.425% lower than my existing loan of 4.15%. Refinancing to this level was the one good thing that resulted from such an economic meltdown.
2011: With the Fed’s announcement to keep rates low until 2013 and their Operation Twist strategy to make sure long rates don’t rise, the 10-year yield plummeted to around 1.85%. I did a no-cost refinance of 3.125% in the Fall and thought I was absolutely done for sure! I extended my lock for another 5 years and planned to live in my house until the rate expired in 2016 and reconsider.
2012: Rates continue to go down even though the markets recover from their 2011 summer malaise. Europe starts imploding again and there is a flight to safety in US dollar denominated assets, including US Treasuries. The US Treasury 10 yield yield drops to below a record low 1.5X% for a brief period. I call my mortgage officer again when the yield rebounds to 1.7% and he tells me I can now refinance no-cost to 2.625%! Banks start lending aggressively again, accepting smaller margins to win market share. Despite taking forever to refinance, I’m happy I did because my interest payment is now 50% lower than when I first bought my house. Meanwhile, rents have risen by 50% in the same period!
2015: I’m back to refinancing again! Turmoil in Russia, low oil prices, depegging of the Swiss Franc, and volatility in the stock markets have led to a tremendous decline in the 10-year government bond yield. Last I checked on 1/20/2015, the 10-year yield was down to 1.85%. I believe interests rates will stay low in all of 2015 and I’m doing my best to lower my 5/1 jumbo ARM at 2.625% with two years of fixed rate left to 2.25%. The key is to get my debt-to-income ratio below 42% given I’ve only got one year of 1099 (independent contractor) income, and banks require two years. I’m using LendingTree Mortgage online to get banks online to compete for my business and give me the best rates. It’s free and easy to use. Simply fill out the relevant information and a bunch of lenders will contact you with offers.
The mistake: In retrospect, my error was getting shaked out in 2007 by the rise in rates. If I just sat tight, I could have saved myself tens of hours and thousands of dollars in baked in refinance fees because my rate would be the same or lower. That said, I do find comfort knowing my mortgage rate will be fixed for the next 5 years. As someone who is now retired, having a fixed rate of 5 years makes the appreciation even more.
The bad: The entity who makes money in all my refinances is the bank. Although all my refinances have been “no cost, no cash outlay” refinances, the fees the bank earns are embedded in my rate. In other words, I woud get an even lower rate if I didn’t have any fees to pay. That said, everybody wins in this scenarios because I’m still getting a lower rate.
The good: The average spread of my shorter term fixed rate and that of a 30-year fixed rate was roughly 1.5%. At every refinance after my initial mortgage the rate was lower. Given the ideal mortgage indebtedness if you can afford it is $1,000,000 ($1,100,000 if you include a HELOC), the average savings a year is therefore 1.5% X $1,000,000 = $15,000. Multiply that by 8 years and that equals $120,000 in interest savings by borrowing at the short end of the rate curve and refinancing.
The real good: If all I did was sit tight with my 5.5% 30-year fixed from eight years ago, I would have end up spending more than $200,000 in interest in eight years. Thankfully, I didn’t just sit on my hands and do nothing. The combination of refinancing and borrowing on the short end of the curve has saved me over $200,000 in mortgage interest in the past eight years. That is some serious money!
REFINANCING TAKES EFFORT, BUT JUST DO IT
Saving money on your mortgage isn’t going to just happen. You’ve got to make it happen.
1) Call various banks and mortgage brokers to get quotes.
2) Understand the terms of each quote thoroughly e.g. interest rate cap, principal and interest split, reset period.
3) Drive over to the bank or mortgage officers officer to discuss the terms and sign the papers
4) Host an appraiser for 5-30 minutes each time so that the bank knows their collateral value.
5) Call back multiple times to see how the process was going.
6) Gathering W2s, bank statements, proof of employment, proof of insurance, credit clear letters.
7) Meeting with a notary to sign 50+ pages at a time.
8) Set up online payments and make sure the payment process worked.
You’ve got to be on the ball and push things through! If I live in my home for another 10 years, that’s another $150,000-$200,000 more in interest savings at least vs doing nothing. Picking up the phone, making photocopies, and trading e-mails isn’t exactly hard work.
REFINANCING HAS NOW GOTTEN EASIER
Since 2004, I’m happy to hear the emergence of online mortgage loan companies streamlines the process and makes it much easier to refinance. Everybody knows that doing things online is a much quicker way to go vs. doing things in person.
Now that I have a personal finance blog, I don’t need to call around or talk to anybody anymore because I get a heads up as soon as a rate looks favorable to me. Representatives from mortgage companies tell me when they have a special. I’ve got a mortgage rate widget that tells me what the lowest conforming rates are. And, I trust the specific offers that I highlight because I’ve used them and clients want to offer their best products otherwise they will get bad reviews.
Yes, I may be addicted to refinancing my mortgage, but that’s because I’m addicted to saving money! The actions of the Fed and the state of the global economy have allowed many to refinance and save. If you are not at least checking for the latest mortgage quote online, you are likely leaving some serious money on the table. If I didn’t check the Spring of 2012, I would have lost out on an additional $20,000 in interest savings over the next 5 years!
Make money and save money. Do that long enough and you will be in great financial shape down the road.
Wealth Building Recommendations
Shop around for a mortgage: Check the latest mortgage rates online through LendingTree. They’ve got one of the largest networks of lenders that compete for your business. Your goal should be to get as many written offers as possible and then use the offers as leverage to get the lowest interest rate possible from them or your existing bank. When banks compete, you win.
Explore real estate crowdsourcing opportunities: 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.
Updated for 2019 and beyond.