The refinance window only lasts so long. There was a massive refinance window during the global pandemic. However, that particular refinance window has closed. Mortgage rates are now at 17-year highs and the housing market is at a standstill since everybody refinanced in 2020, 2021, and early 2022.
When the next refinance window opens, I recommend refinancing as many times as possible if existing rates are at least 0.5% lower. Another factor to consider is if you can break even on the refinance costs within 24 months. Not refinancing due to laziness or fear is quite stupid.
You can get a no-cost refinance that immediately lets you save. Just know the lender has to make money somewhere. Here are all the costs in a no-cost refinance.
It's interesting to note that the larger your mortgage to refinance, the lower your explicit refinance costs. Given I believe the ideal mortgage amount is $1 million dollars (if you can afford it) for tax purposes, my refinance costs are often “no cost” with fees simply embedded in the new lower rate.
There is no free lunch, but it sure feels that way when a bank says do you want a 0.5% lower rate that will cost you nothing out of pocket!
As with everything in personal finance, always run the numbers before making any financial decision. In fact, sometimes the math works in your favor to pay a small mortgage fee instead of get a large credit.
Refinance Window Closing – What To Do?
It's all about perspective in finances. Although you may have missed the last refinance window, let's take a look at a past example of a two year window.
As you can see from the chart, the two year high for the 10-year yield is 3.2%. Going from 2.15% to 3.2% is a huge 50% move higher which should scare the bejesus out of bond holders who will lose a lot of money since principal price moves in reverse of yields.
As a mortgage holder, you are actually also a bond investor. Let's say you refinance $100,000 to 3% for a 5/1 ARM with the 10-year yield at 2.15%. In the next year the 10-year yield does indeed move up to 3.2% making 5/1 ARMs now 4%.
You essentially sold short $100,000 worth of bonds at 3% and made $25,000. How so? To get to a 4% interest, your original $3,000 annual interest cost must now be divided by $75,000 in principal (3,000/75,000 = 4%). Read this paragraph carefully again as I know the inverse relationship between interest rates and principal can get confusing.
Look at the above situation from the banks point of view. They hate receiving only 3% a year when they can now receive 4% a year. Good thing they've matched assets and liabilities. Banks hope you either prepay your mortgage, refinance to a higher rate, or sell your property so somebody else can get a new higher rate mortgage. As a mortgage holder in an increasing rate environment, you want to hold on until the very end and never prepay!
Based on a two year chart interest rates still look low if you are kicking yourself for not being proactive enough to at least get a no obligation quote online.
Interest Rates Over A 10 Year Time Frame
Now let's extend the example above using a 10-year chart. Even if the 10-year yield ramped to a two year high of 3.2%, that's still quite low compared to a 10-year high of around 5%. What's most interesting in this chart is how the 10-year yield only got to a low of 2.2% during the DEPTHS of the financial crisis. Four years passed and the economy got much stronger yet the 10-year yield was still only at 2.15%. Got to love central bank intervention!
Bonds were in a 30-year bull market. Not only did rents increase but so did property prices despite the correction. Meanwhile, the value of homeowner's mortgages also increased as I've explained above.
Locking in a 30-year fixed mortgage rate for the past two decades has been a suboptimal proposition due to the decline in rates. Please read Adjustable Rate Mortgage Or 30-Year Fixed where I argue why locking in long term wastes you money. The best mortgage option would have been based on a 1-month LIBOR rate. The question is what now?
Even if rates have risen, if you can find a new mortgage rate 50 bps lower than your current mortgage rate, with a duration that matches your risk tolerance, then I would still refinance. Over a 2-30 year period, mortgage rates are still dirt cheap. A 15-year mortgage looks very attractive post-pandemic too.
The big fear in the bond market is that the Fed stops feeding us their juice. They've got to slowly ease off their monetary stimulus probably over a course of five years if they don't want to hammer stock market addicts.
What I'm Doing To Make Money And Refinance
My primary mortgage was refinanced a year ago before I left my job thank goodness. Otherwise, I would never have been able to refinance due to a lack of W2 income. Refinance before quitting please! My vacation property received an out of the blue loan modification earlier this year so that's set.
The only thing I'm left with is my primary rental property. It has an interest rate of 2.625% with four years left on a 5/1 ARM. I would ideally like to refinance this ARM to another ARM at closer to 2.25%. However, the mortgage amount is small. Therefore, I plan to either sell the property or just let it float after the lock is over. In four years, the principal will be naturally be reduced by another 13%. This gives me some buffer in case rates rise.
The investor in me does not believe the Fed will allow the 10-year yield to continue ramping so soon. As a result, I am going LONG the 10-year bond by buying the ETF, IEF. I don't plan to make or lose more than 3% on IEF. As a result I've dumped a chunky 35% of my rollover IRA into the name. IEF is my hedge against a collapse in equities and a place to park my cash which earns nothing. My year-end target for the 10-year yield is 2% or lower.
The irony is that the higher the 10-year yield goes, the more susceptible equities are to a pullback. The reason is because bonds become more attractive relative to equities. The bullish way to look at a rise in interest rates is a rise in monetary demand due to an improving economy.
With rising inflation expectations post-pandemic, interest rates could rise. However, with so much accommodation by the Fed and the Federal government, rates may just stay low. I believe there is no housing market bubble.
Shop Around For A Mortgage
Curious what rates you could get today? Check the latest mortgage rates online for free. You can get free, no-obligation quotes in minutes. The more lenders compete for your business, the lower your rate. Take advantage before the next refinance window closes.
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