You always need to fight to get your mortgage rate costs down so you can maximize your cash flow and minimize your living expenses. As someone who has refinanced over 20 times with multiple properties over 20 years, let me share some strategies for getting a lower mortgage interest rate.
Many homeowners got crushed during the 2008-2010 financial crisis because they could not hold onto their homes because the carrying cost was too high. Many ended up selling their homes at the bottom of the market, only to see home prices surge by 50% – 100% within the next 10 years.
The housing market is now very strong post-pandemic. I expect the housing market to stay strong for years to come. Ideally, you want to own your home for as long as possible with the mortgage interest rate possible.
Strategies For Getting A Lower Mortgage Rate
Here are the best strategies for getting a lower mortgage rate.
1) Pressure your existing mortgage lender or main bank: The first step everyone should do is talk to their existing bank or existing mortgage lender and ask if they can give you a better rate. If not, tell them you plan to refinance your mortgage or get a mortgage with another bank. The more they value your business, the more flexible they will be. After all, they have all your information. If they can lower your rate while still keep your business, it's a win.
2) Shopped around online: Check out Credible to see what their bankers could come up with. I like LendingTree because they have one of the largest mortgage lending networks online, and they aggressively compete for your business. Within five minutes of filling out the application, I got several phone calls and e-mails. They are super efficient, so don't be surprised. Get the mortgage offers in writing so you can prove to your bank that you have better deals.
3) Tempt the bank with more business: A bank not only wants to earn a mortgage interest spread off you, they want you to open as many different financial accounts as possible e.g. savings, checking, and potentially investment account. Banks want sticky clients with multiple accounts for cross selling and revenue generation purposes. There is no legal quid pro quo that banks can use to get you better terms. But every big bank has a tiered client system in place where clients with more assets get better access, rates, and benefits.
4) Follow through with your promise. If the bank offers to match or beat any mortgage interest rate out there, it is in your best interest to open up different financial accounts with them. At least open up a savings and checking account. Your bank will provide you better service the more money and the more accounts you have open with them.
The Relationship With Inflation And Mortgage Rates
Knowing when to refinance is like being a bond trader. Bond traders obsess over inflation assumptions, and you should have at least a basic assumption as well. There has been tremendous monetary expansion since the economic downturn, which should ultimately lead to higher inflation. Basic economic theory says that for every new $1 dollar bill printed, there will eventually be a $1 increase in prices in the overall basket of goods. The key word is eventually, which could be decades away.
Those with adjustable rate mortgages (ARMs) are this century's winners because rates have been resetting at equal to lower levels than when they were originally fixed. Those who've been borrowing with 30-year fixed mortgages have been losers because they've been paying 1-2% higher interest rates than necessary.
Sure, there is perhaps more peace of mind knowing that your mortgage interest rate is fixed for the life of the loan. But most people either pay off their loans in under 30 years or move every seven years. Bankers push people into fixed rate mortgages because they can earn a higher spread.
Inflation has been coming down now for over 30 years. I see little reason to expect inflation to suddenly jump higher given the tremendous output gap in the economy. Further, we've become smarter and more efficient with technology. If inflation does start rising, at least you know that your assets are by definition also rising in nominal value.
The figure to watch is the 10-year US treasury yield. The spreads between treasury yields and bank mortgage rates have narrowed since the crisis. Most long-term duration mortgages are related to the 10-yr bond yield. Hence, whenever you see the stock market crashing, watch bond prices rise, and yields fall. This is the exact time to refinance.
Fixed Rate And Homeownership Duration
It's best to match the time it will take for you to pay down your mortgage and the fixed duration of your mortgage once you've made assumptions about inflation and interest rates. For example, if you need 30 years to pay off your mortgage, then it's probably most prudent to get a 30-year fixed mortgage, even though the interest rate is higher than an ARM mortgage.
But if you plan to only own your home for 5-10 years because you're planning to work in a different state or country, then getting a 7-10 year ARM is more optimal. The shorter your ARM, the lower your mortgage interest rate because it is being pegged to the shorter end of the yield curve.
Just know the average duration for homeownership is around 10 years before a house is sold. Therefore, it makes sense for most Americans to take out no longer than a 10-year ARM. An adjustable rate mortgage is better than a 30-year fixed.
Watch The Yield Curve When Refinancing
Given the yield curve is generally sloping, longer duration loans have higher interest rates. This is a truism for the most part. Except during times of extreme economic duress, where the yield curve flattens, or inverts given people want their money as liquid as possible. Assuming a normal upward sloping yield curve, you will pay a higher rate for a longer duration mortgage.
However, as of 2019, the yield curve is flattening, portending to a significant economic slowdown. Therefore, paradoxically, it becomes better value to borrow with a longer duration because the cost to borrow at say 30 years is now only slightly higher than it is to borrow at 5 years. Whatever the case may be, you need to lock down your mortgage interest rate costs and/or not buy too much house.
Bake In Refinancing Costs
Unfortunately, there is no free lunch. With every new mortgage or refinanced mortgage, there is a cost for the benefit. The general rules of thumb are as follows:
- Consider refinancing if you can save at least 0.5% (50 bps) off your rate.
- Consider refinancing if you can break even in one year, and no longer than 2 years.
You must do the math carefully and consider your holding period for your house. If you plan to sell your house within 3 years, it's probably best NOT to refinance your mortgage. It's also sometimes a pain to refinance a mortgage.
One mortgage refinance took me four months because of a credit report snafu. But in the end, I'm glad I did it. I ended up saving 10s of thousands of dollars over the next five years.
Shop around for a lower mortgage rate: Check the latest mortgage rates online through Credible. 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. Then use the offers as leverage to get the lowest interest rate possible from them or your existing bank. Credible allows you to compare multiple real quotes, all in one place for free. When banks compete, you win.
Explore Alternative Real Estate Investments
After selling my SF rental house in 2017 for $2,740,000, I ended up redeploying $550,000 of the proceeds in real estate crowdfunding. My goal was to take advantage of lower valuation properties in the heartland of America.
I was earning a cap rate of 2.5% on my San Francisco rental. Now I'm earning 10% – 15% based on 18 different commercial real estate and multifamily properties I own. It's incredible to earn income passively while still having diversified exposure to real estate.
With real estate crowdfunding, you don’t need to risk $100,000 or more to invest in commercial real estate. Instead, you can invest for much lower amounts such as $5,000.
The best real estate crowdfunding platforms today are:
1) CrowdStreet, founded in 204 and primarily for accredited investors. They are great because they focus on emerging, “18-hour cities” where growth is faster and valuations are lower. There is a huge demographic shift towards the heartland of America due to cheaper prices and the rise of telecommuting. It's good to take advantage. It's free to sign up and explore.
2) Fundrise, founded in 2012 and available for accredited investors and non-accredited investors. I’ve worked with Fundrise since the beginning, and they’ve consistently impressed me with their innovation. They are pioneers of the eREIT product.
Both of these platforms are the oldest and largest real estate crowdfunding platforms today. They have the best marketplaces and the strongest underwriting of deals. Investors should carefully consider their own investment objectives when assessing the gamut of real estate opportunities that are available.
About the Author:
Sam started Financial Samurai in 2009 as a way to make sense of the financial crisis. He proceeded to spend the next 13 years after attending The College of William & Mary and UC Berkeley for b-school. Then he worked at Goldman Sachs and Credit Suisse. He owns properties in San Francisco, Lake Tahoe, and Honolulu and has $810,000 invested in real estate crowdfunding. In 2012, Sam was able to retire at the age of 34 largely due to his passive income portfolio.