As a multiple residential property owner, I am constantly watching interest rates and the 10-year yield. A refinance opportunity has emerged yet again now that mortgage rates have declined. Has it been a while since you last refinanced your mortgage? Now is the time to check mortgage rates for free. See how much you could save.
Earlier this year I refinanced one of my rental properties. Fortunately, I locked in a 2.625% rate for a 5/1 conforming ARM. So I have another 4.5 years until my interest rate adjusts upwards or downwards.
My payment is roughly $2,800 a month – $1,350 of which goes to principal. I'm not too worried about rising rates down the road because the property generates $4,500 a month in rent.
A Look Back At Interest Rate Movements
About four years ago, interest rates surged higher as investors dumped Treasuries due to a “risk-on” mentality in equities. In other words, investors were willing to take on more risk for higher returns in equities since Treasuries yielded under 2%.
Wide anticipation of tapering by the Fed and expectations for higher inflation also led to a sell-off in bonds causing rates to go higher. At one point, the 10-year yield climbed close to 3% from just 1.62% six months earlier. Bond funds were absolutely hammered, including REITs.
Treasuries rebounded as investors took advantage of higher yields and asset allocated towards safety with the stock markets at record highs and the government in complete disarray.
Refinance Opportunity Time
Fast forward into the global pandemic. Rates came down significantly in 2020. So if it's been a while since you refinanced, you will likely be able to lock in a lower rate.
Lending margins have also come down. In other words, banks are not charging as high a spread between their lending rate and cost of funding because competition has heated up.
When I refinance I always check with two sources:
- My main bank and
- Online through Credible. They have one of the largest network of mortgage lenders on the web and there's no obligation to act. This is a great way to ensure you can get the most competitive mortgage rate possible.
The reason I always check with both my main bank and Credible is because I basically pit them against each other. When lenders compete for your business, you win and save more money.
Mortgage Rates Decline
Take a look at these interesting charts on recent mortgage rates. A refinance opportunity is clear given this decline in rates.
Back on 6/2/16 I remember I was so ecstatic that I finished refinancing. I got my 5/1 jumbo ARM of $850,000 down to 2.375% for one of my properties. Due to rates declining further this year, and another refinance opportunity emerging, I'm refinancing this same property yet again.
A five year fixed term is in the sweet spot of the rate curve. Interest rates have been coming down for over 35 years. Read: 30-year Fixed Or Adjustable Rate Mortgage for more of why I'm a proponent of ARMs. There's no need to pay more because interest rates should stay low for a long time.
Note: If you are a bond trader, refinancing now or getting a new mortgage is like going short bonds. Your locked in mortgage appreciates in value as bonds decline and interest rates rise and vice versa.
So the main question as a bond trader now is whether you think interest rates will continue to fall (wait to refi). Or whether you think this decline in interest rates is only temporary (refi now). Of course if you are a buyer, you don't care as much as you do locking in your financing to get the purchase squared away.
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Update 2024: It's too bad mortgage rates have risen so much. But with inflation rolling over and the Fed expected to cut three times in 2024, getting a lower interest rate on a mortgage is getting easier. Stay patient.
I think it comes down to supply and demand at the 5/1 level as well as credit worthiness. More demand from wealthier borrowers of 5/1 jumbo loans and banks are addressing the demand through competitive rates. I’m going to ask my mortgage loan officer as well.
Rates are at historic lows – why not get a 30 or 15 year fixed note and pay it off using a bi-monthly payment schedule?
B/c the spread on a 30yr vs. a 5/1 is very large, causing an excess waste of money in what I think is a long term low interest rate environment.
We looked into a 5/1 mortgage on our personal residence over the summer. At the bank I work at I was being offered a 1.99% fixed with $300 closing costs. Since our house was nearly paid off at the time the only thing we were going to do was cash out around $100,000 and get it into the market.
Instead we decided to simply get the mortgage paid off and keep it paid off. The market is up around 4% since then, but I’m happier knowing I have no mortgage.
Sounds good. Whatever you feel makes you the most comfortable is best!
I agree this is a refinancing opportunity , but you should lock in for a longer period. If you will own your property beyond 5 years, you are risking higher interest rates.
We’ve been going down for 30 years in a row, and the spread is still very high btwn 30yr and 5year. You sure rates will be higher?
Rates are artificially low because of the Fed. It cannot stay this low and I think you will see an increase within the next few years as the economy finally gets better.
You should consider investing a large chunk of your net worth in TLT or TBT then. Will so very well if you are right.
My third and I hope last refi was March 2013 at 3.125/20y. The original rate was 5.5/30y in 2003. First refi was 4.875/30y in 2009. Second was 4.325/30y in 2011.
Haven’t seen a 20y for a while. A great rate you got!
We bought a new house (and took out a 30 yr fixed mortgage) in March of this year. Considering we’ll likely be in this house for at least 10 years (and hopefully much longer than that) I’d say we did pretty well for ourselves. In 5 years, mortgage rates will be much higher than they are today.
If you know this for sure, you should put your life savings and short the hell out of bonds. Honestly, you can really make a lot of money.
But just don’t look at the 30+ year history of treasury yields. They’ve been going down for 30+ years in a row.
That’s a great rate which is be happy with for the life of the loan.
You probably could have got 2.5% for a 5/1 then, but it’s in the past so no big deal.
I’m still at the renter portion of my life. Mostly this is because I’m not sure if I’ll be where I am at long term to justify buying a house. That said, I am on the fence whether I want the rates to stay low until I get to that point or if it would be better for them to go up. The reason I’m not sure is I know higher interest rates puts more pressure to lower overall house prices (since interest eats up more of the monthly payment, people can’t afford as expensive a house). It would be interesting to see some numbers as to which one could save you money over the long term. Lower interest rate on a more expensive purchase or a higher interest rate on a less expensive purchase.
Purchase price is always more important that interest rate imo. You can conceivably always refinance to a lower rate, but you can never go back and purchase at a lower price.
Interest rates don’t always eat up more of the monthly payment.
For example, ANY 15 year mortgage has a higher principle payment than interest if the rate is 4 5/8% or less. However, it has to be a rate of 2.3125% or less for ANY 30 year mortgage.
And Sam has a very valid point, you can possibly change the rate, but you can never go back and change the initial purchase price.
I’m trying to close on another rental, and was pleasantly surprised to learn of the new, lower rates. I was expecting 5%+ which was the case just a month ago.
Mortgage, what’s that? I’m more interested in your detailed analysis of when to dip the toes back into the bond market.
Several weeks ago as mentioned in my private newsletter. Did you not get it? Current levels are not very interesting any more in bonds.
Sam, I just checked my email again and don’t see it. Is it possible for me to get a copy of that newsletter sent to my email of record? Or would you prefer I re-subscribe? FYI, it was only about two weeks ago when I first signed up. Thanks in advance!
Sam, I do remember also signing up since I enjoy your thoughtful blogs and valuable insights; but did not receive the private newsletter :(. I clicked on the above link and it tells me that I am already subscribed.
Can you please check the list?
Thanks,
John
Will check. I might have cocked things up as this is a new initiative.
I’m good now…re-subscribed.
I really hope interest rates remain low while we look for a house.
In this period of unprecedented interest rates is a great time to refinance over the long term.
In the UK, the maximum mortgage length is 10 years and currently the cheapest available for a rental property is 3.89% (more than the 15 year fix in the US) and with a substantial fee attached.