If you’re wondering, “Should I refinance now?” The answer is absolutely YES you should refinance now. Mortgage rates collapsed to all-time lows in 2020 during the height of the pandemic. Now, mortgage rates are ticking back up because of heightened inflationary fears.
With so much pent-up savings and demand, surely prices are going higher as the economy reopens. Stock markets are near all-time highs. Demand for real estate is very strong as well.
If there’s one asset class you should own in an inflationary environment, it’s real estate. Inflation whittles down the real cost of a mortgage. Meanwhile, inflation boosts the value of real estate. This one-two combination is huge for the average person in building wealth.
You guys know that the one and only data point I track religiously is the 10-year yield right? Well, after the 10 year yield rebounded to over 1.6%, I went to the bank with a buddy of mine to go see how much money we could borrow.
Should I Refinance Now? A Conversation With A Banker
The wiry banker sat us down like a loving couple and asked us to go through our finances at which point I kindly stepped out of the room and let him go first. Five minutes later, he came out with a grin on his face, so I curiously went in.
He proceeded to tell me some curious news. “Look here Sam, you can borrow up to $1.5 million dollars at a 5-year fixed rate at 2.5%!”
Holy moly really? You mean little old me, just like that can borrow that much money at that low of a rate? “So what’s the catch?”, I ask.
“Zero points, and $2,500 in closing costs. But don’t worry, we are giving you a $500 credit for being a preferred member, and frankly, if you guys both take out loans, I’ll throw in another $500 credit,” said the banker.
“Done! Where do I sign?, I ask as I think about all the money I’ll get to borrow.
Not So Fast! Refinance To Save
Unfortunately, things aren’t that easy. I’m not eligible to borrow $1.5 million to buy anything. I’m only eligible to borrow up to $1.5 million if I want to buy another piece of property or refinance my home. Good thing I’ve got a mortgage at 4.625% to refinance, and that’s exactly what I’m going to do.
An interesting thing to note for those who have adjustable rate mortgages is that if it starts floating today your interest rate will be only 2.5% – 2.625%. But, if you can lock in for another 5 years at 2.5%, might as well do so now.
The amazing thing about this year vs. last year when the 10-yr yield was lower is that banks were’t lending as much. The 10-year treasury rate actually dropped to 0.51% in March 2020 (2.25% in October 2008), but nobody could get a loan. If they did, spreads were egregiously wide that it wasn’t profitable to refinance. Now, demand and liquidity is high.
If you can refinance your mortgage or get a new mortgage, you are in great position to take advantage of real estate deals.
Below is a chart of the latest mortgage rates. Notice how they all hit all-time lows in 2020, but are creeping up again. Take advantage by checking on Credible for free. Credible is my favorite mortgage marketplace where qualified lenders compete for your business. Get free rate quotes in minutes.
A Mortgage Refinance Example
Let’s say my mortgage is $1.5 million at 4.625% for illustrative purposes. My monthly payments would be around $7,712 a month in principal and interest.
Just by having a 10 minute conversation, and filling out some paper work with minimal cash out of my pocket, I’m able to refinance a jumbo loan of $1.5 million down to 3.75%. The result is a $812 a month increase in cash flow as the payment drops to $6,940!
Now let’s take a look at the principal and interest breakdown of $7,712 a month at 4.75%. About $5,781 goes to interest and $1,931 goes to principal.
At a 3.75% interest rate, your monthly payment drops to $6,940 with just $4,680 in interest and a healthier $2,260 in principal! In other words, not only do you pay less overall for better cash flow management, you pay less interest a month and more principal.
In percentage terms, even though your overall monthly payment just drops by just 10% ($7,712 a month down to $6,940) your monthly interest payment goes down 21%, and your principal payment goes up 20%. Funny how math works.
Take Advantage Of An Aggressive Federal Reserve
Thanks to the Federal Reserve lowering the Fed Funds rate to 0% – 0.25% in 2020, mortgage rates have also declined. Mortgages follow the treasury bond market more closely. However, the Fed still has a strong effect on interest rates.
The refinance wave is coming again and that means more money in consumer’s pockets. In my example above, one has $812 extra cash to buy a new iPad every month for the next 5 years if so desired. One could also use the money to buy two round trip tickets to Hawaii, eat 15 steak dinners, lease a $60,000 automobile for no money down, or pay down more debt every month as well. Oh the possibilities are endless!
Of course one shouldn’t start spending frivolously, but the point is there will be a consumption boom as hundreds of thousands of people across America see a nice uptick in their monthly cash flow. Given ~68% of Americans own homes, and consumption accounts for over 60% of GDP one should feel encouraged that our economy is not going to fall off a cliff again!
Note: It’s advised to match the fixed rate portion of your loan with your intended length of ownership. In other words, if you plan on moving in 5 years, get a 5/1 ARM. If you plan on holding your property forever, a 30-year fixed mortgage might be the way to go. Also be aware that you need a loan-to-value of 80% or less, and likely a 720+ credit score to take advantage of current low rates. This irony of monetary policy is that it may very well benefit those who need help the least.
Refinance your mortgage. Check out Credible, one of the largest mortgage lending marketplaces where lenders compete for your business. You’ll get real quotes from pre-vetted, qualified lenders in under three minutes. Credible is the easiest way to compare rates and lenders all in one place. Take advantage of lower rates by refinancing today.
Explore real estate crowdfunding. If you’re looking to buy property as an investment or reinvest your house sale proceeds, take a look at Fundrise, one of the largest real estate crowdfunding platforms today. They allow 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 they 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.