I’m on a mission to help encourage as many people to refinance in American as possible. I get nothing in return, just the satisfaction of trying to help others save money.
Lots of people have mortgages, but most people are not a rate hawk like me. Thus, I’m here to give you a nice kick in the pants to save some money every month for the next 5-to-30 years of your life.
Nobody gave me a kick in the pants when I locked in my refi. Which is why I had to pay 0.125% higher than I should have. I was unsure and waited a little too long.
Banks have promotions all the time. Your duty as a borrower and saver is to identify which banks are offering the most attractive terms at any given moment.
I’ve had great results with Citibank and Wells Fargo. They’ve had mortgage rates often 50 basis points (0.5%) cheaper than other competitors for 5/1 and 30-year mortgage products.
Citibank and Wells Fargo on a rampage to build up their loan book again. As patriots, it’s our duty to spread the word and make sure we don’t fall off a cliff again!
The Biggest Hurdle To Refinance In America
I’ve spoken to several people who are having a difficult time refinancing simple due to the LTV loan-to-value ratio of their house. For those who don’t know, banks generally have a maximum LTV now of 80%.
In other words, if you have a house worth $1 million dollars, you can not borrow more than $800,000 ($800,000 / $1,000,000 = 80%).
A LTV of greater than 80% is viewed as too risky in this more conservative day and age. Banks may still lend you money to refinance in America, but at a much higher rate than you may like.
Many areas of the US have experienced over 13 consecutive months of year over year increases in housing, but values are easily 10-20% lower than the peak.
In the example above, your loan to value percent rises to 100% if your house value falls 20%. This is because a mortgage of $800,000 equals the value of your house. In this scenario, what are you going to do to take advantage of these blockbuster low interest rates?
Lower Your LTV Ratio And Refinance
If you love your home, and plan on staying in it for a long time you may simply want to pay down your mortgage to make your LTV 80% or lower again.
Here’s a great example I modified from a WSJ article highlighting the trend of putting more cash in your home:
- Value of Home: $910,000 from $1,100,000 just a couple years ago.
- Current loan balance: $809,000 (on a 30-year fixed mortgage at 6%)
- Loan-to-value = $809,000 / $910,000 = 89% = too high!
- Current monthly payment: $6,398
- Cash paid at closing to retire current loan: $80,000
- New loan terms: $729,000, 15-year fixed mortgage at 4.375%
- Updated loan-to-value = $729,000 / $910,000 = 80% = compliant!
- Lower new monthly payment: $5,530
- Monthly payment savings: $868 per month ($6,398 – $5,530)
- Return on the $80,000 investment: $868 / $80,000 = 10.4% return annually for five years.*
*Includes both the principal paid down on the new, shorter-term loan and the monthly savings in loan payments.
I don’t know about you, but I would throw ALL my money at an investment that guarantees 10.4% annually a year. Ten percent returns is what Bernie Madoff promised, and he built a $50 billion empire!
Hence, the key variable is whether you want to stay in your house for 10+ more years and whether you have the cash on hand ready to pay down your mortgage and refinance in America.
The fact that more people are injecting more cash into their homes tells me that people have become conservative with their finances. In addition, they and are looking for as close to sure things as possible.
If you are tying up tens of thousands or more dollars in an illiquid asset, you’re also showing that you are more confident about your financial future.
It’s unfortunate that not everybody who owns a home can take advantage of current low rates without having to inject more cash.
But, if you are adamant on taking advantage of the current low rate environment in the US, and plan to stay in your house indefinitely, then it behooves you to pay down that mortgage and increase your disposable income.
Your budget will thank you in the long run, and America will thank you further!
Note: Hopefully many are able to take advantage of these rates because you’ve followed the 30/30/3 rule of home buying. With a 20% buffer, and an extra 10% in cash savings, you should be alright.
Wealth Building Recommendations
If you’re looking to buy property as an investment or reinvest your house sale proceeds, take a look at Fundrise. They are one of the largest real estate crowdfunding platforms today.
Fundrise allows everyone to invest in mid-market commercial real estate deals across the country that were once only available to institutions or super high net worth individuals.
They are the pioneers of eREIT funds and are creating an Opportunity Fund to take advantage of tax-efficient Opportunity Zones.
Thanks to technology, it’s now much easier to take advantage of lower valuation, higher net rental yield properties across America. Personally, I’ve invested $810,000 in real estate crowdfunding to diversify and earn income 100% passively. I believe the real estate market will stay strong for years to come.
If you enjoyed this article, please sign up for the Financial Samurai Newsletter to receive exclusive content. Further, you can subscribe to the Financial Samurai podcast for even more insights and tips.