Be a mortgage refinance king to save money and maximize your returns on your real estate. Whenever interest rates decline, you must take action to refinance and save.
Ever since starting Financial Samurai in 2009, 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!
Mortgage Refinance King (Or Queen)
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 40% 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 more than 50% thanks to a flood of innovation and jobs in the Bay Area.
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. 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
I got a 30-Year fixed rate mortgage 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 Refinance
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: Mortgage Refinance To A 5/1 ARM
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: Mortgage Refinance To Another 5/1 ARM:
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: No-Cost Refinance
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: Another No-Cost ARM Refinance
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: Another 5/1 ARM Refinance
I'm back to refinancing again! Turmoil in Russia, low oil prices, de-pegging 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. An adjustable rate mortgage is more optimal choice that will save people more money over a 30-year fixed-rate mortgage.
2019: Refinanced To A 7/1 ARM
I refinanced my latest primary residence I bought in 2014 in Golden Gate Heights. It was an expiring 5/1 ARM at 2.625%. I was able to refinance it to a 7/1 ARM at 2.625% with no fees, and actually a $500 credit! I gotta admit, it was a long and arduous process if you want to read about it.
But what's amazing is that the property has gone up by around 35%, while my mortgage payment has declined from $3,400 to now $2,800. This double win by millions of homeowners in America is one of the key reasons why I'm bullish about the 2021 housing market.
2020: New Home Purchase With 7/1 ARM
A month after lockdown began, I found another sweet home in San Francisco with panoramic ocean views on three levels. The house had decks and was completely remodeled and done. With a new baby, I really wanted more space.
I first got pre-approved for a mortgage, which took about 4 weeks. Then I was able to get a jumbo 7/1 ARM for only 2.125% for no fees! This home I bought is $1.2 million more than the house I bought in 2014, but costs a little bit less a month to own thanks to low interest rates.
At roughly 3,000 sqft, the house is perfect for a family of four with an au pair. The value of real estate has gone way up because we're all spending so much more time at home.
What's nuts is that average 30-year fixed-rate mortgages are now about 5.875%. Further, the inflation rate is over 8%. In other words, my current primary residence mortgage has a negative real mortgage rate of over 6%.
Inflation is paying down my debt for me, which is why there will continue to be fewer homes for sale. Who wants to let go of their low mortgage rate? Homeownership tenure should increase given 90%+ of homeowners with a mortgage are paying below a 5% rate.
I expect inflation and mortgage rates to come down by 2023. And I plan to hold onto my 7/1 ARM until 2027.
Mortgage Refinancing Review
To become a mortgage refinance king, it's always good to review what you've done and learn from your mistakes.
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.
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 $750,000, the average savings a year is therefore 1.5% X $750,000 = $11,250. 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 great: 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!
How To Become A Mortgage Refinance King
Saving money on your mortgage isn't going to just happen. You've got to make it happen. Here's what a mortgage refinance king does:
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 Can Still Take A While
For the first five years after the 2008-2009 financial crisis, it took a while to refinance a mortgage or qualify for a new mortgage. Only the people with the best credit and finances got a loan.
Starting around 2014, lending standards got easier. However, once the pandemic hit in 2020, lending standards started tightening up again. Banks are expecting a wave of foreclosures in 2021 and beyond, despite property prices going up. The foreclosures may come from renters not paying their rents due to an eviction moratorium.
Thankfully, the economy is rebounding and stocks and real estate are strong. Just expect the refinancing process to be difficult again due to higher mortgage rates and fears of a slowdown.
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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.
Be a mortgage refinance king or queen. The investment trend is investing in real estate in the heartland of America due to lower costs, the ability to do so, and the rise of remote work.