Financial Samurai

Slicing Through Money's Mysteries

The Federal Reserve Doesn’t Control Mortgage Rates, The Market Does

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The Federal Reserve Doesn't Control Mortgage Rates, The Bond Market Does

Ever wonder why mortgage interest rates sometimes don’t decrease when the Federal Reserve cuts interest rates and vice versa? The simple answer is that the Fed does not control mortgage interest rates.

Instead, the Federal Reserve controls the Fed Funds Rate (FFR), which is an overnight interbank lending rate. An overnight rate is the shortest lending term, which means shorter duration lending rates such as credit card interest rates and short-term car loan interest rates will be affected.

However, mortgage rates have longer duration lending terms. Therefore, longer duration U.S. Treasury bond yields have a far greater influence on mortgage interest rates than the FFR.



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Why Mortgage Rates Don’t Drop As Quickly As Treasury Yields

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You know how you see oil prices drop precipitously on the news, yet when you get the gas station to save some money, you’re disappointed because gas prices haven’t gotten much cheaper?

The same thing happens with US Treasury yields (oil) and mortgage interest rates (gas). Mortgage rates are largely influenced by the latest 10-year U.S. Treasury bond yield and will move in the same direction. However, given there are so many different types of mortgages and frictions, mortgage rates won’t necessarily change by the same magnitude.

The coronavirus-induced market meltdown has sent US Treasury bond yields tumbling to all-time lows. But mortgage interest rates are only at ~8-year lows, not all-time lows.

Some Financial Samurai readers are even saying mortgage rates haven’t moved down at all or are actually going up as Treasury yields collapse. If you find yourself in this situation, please keep looking.

So why aren’t mortgage rates going lower as quickly as US Treasury yields? Let me explain.



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Cash-out Refinance To Buy Stocks? Not A Good Idea

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A cash-out mortgage refinance lets you borrow more than you currently owe and keep the difference as cash. It’s one way to unlock the equity in your house. Taking out a Home Equity Line Of Credit (HELOC) is another way.

The most you can borrow from your house is usually an 80% loan-to-value (LTV). In other words, if your home is worth $1,000,000, and you have a $500,000 mortgage, the most you can refinance would be $800,000 and receive $300,000 in cash.



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How To Get The Lowest Mortgage Interest Rate Possible

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Time to refinance a mortgage once againRefinancing a mortgage today is a smart move because interest rates have fallen to all-time lows in 2020 due to the coronavirus pandemic. Investors fled from stocks and into the safety of bonds, thereby pushing Treasury yields and mortgage interest rates to the lowest they’ve ever been.

Thankfully, homeowners have gained a huge amount of equity since 2012. They aren’t going to foreclose or short-sale for nothing. In fact, I think 2020 and beyond is a good opportunity to buy real estate due to rising affordability and an underperformance in real estate prices compared to the S&P 500 in 2019, which was up 31%.

I’ve refinanced multiple mortgages across multiple properties since 2003. I also recently refinanced my mortgage in late 2019. Here are my strategies for how you can get the lowest mortgage rate possible.

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Why An Adjustable-Rate Mortgage Is Better Than A 30-Year Fixed-Rate Mortgage

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If you haven’t been paying attention, thanks to pandemic fears, the 30-year bond yield and the 10-year bond yield have reached all-time lows. And when Treasury bond yields hit all-time lows, mortgage rates follow suit.

In a strange way, I wish I still had a mortgage to refinance. In mid-2019, I locked in a 2.625% 7/1 ARM for no cost. If I could refinance the mortgage today, I probably could get at least 2.375% for no cost. Oh well.

For those of you smartly looking to refinance, do a cash-out refinance, or purchase a new property, I’m here to argue that an Adjustable Rate Mortgage (ARM) is better than a 30-year fixed-rate mortgage (FRM).



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For The Best Mortgage Rate, Refinance Before These Three Life Events

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For The Best Mortgage Rates, Refinance Before These Three Life Events

I dodged a bullet, Matrix style, and I didn’t even realize it until the coronavirus hit. The coronavirus pandemic has caused mortgage rates to drop once more as investors seek the safety of bonds.

Had I not refinanced my primary residence mortgage before I bought a larger house, I wouldn’t have been able to get my low rate or maybe even refinance at all.

Nowadays, banks are extremely stringent when issuing new mortgages or refinancing old ones. LIAR NINJA loans are gone. 0% down payments and negative amortization loans are also no more.

This lending stringency is one of the main reasons why I don’t believe the next housing bust will be as bad as the last one. The combination of massive housing equity gains plus high credit-worthy buyers since 2009 means that any correction will be modest.



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Refinance Your Mortgage Now As The Yield Curve Inverts

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It's Time To Refinance Your Mortgage And Boost Your Cash Flow

On March 11, 2019, Federal Reserve Chair Jerome Powell indicated there will be no further rate hikes in 2019, even though he suggested that two were likely this year as recently as December 2018. Then in August 2019, the Fed finally cut rates for the first time in 10 years.

A rate cut is welcome news for borrowers and investors. However, declining fixed income yields is also a sign of slowing growth. The Federal Reserve does not see the economy as strong enough to withstand higher interest rates.

It’s hard to accurately predict the future. The bond market is telling us one thing and the stock market is telling us another.

But when you’ve got a bird in the hand, don’t let go. Every homeowner should at the very least refinance their mortgage now and boost cash flow.



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The Ideal Mortgage Amount Is $750,000 (If You Can Afford It)

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The ideal mortgage amount was $1,000,000 before the Tax Cut & Jobs Act was passed for 2018 and beyond. The reason why $1,000,000 was ideal was because that was the mortgage limit for where you can write off the interest. Today, that maximum mortgage size you can get to be able to write off the interest is $750,000.

Back in 2002, a $1 million mortgage cost around $50,000 to $65,000 a year in interest expense given mortgage rates were 5%-6.5% for a 5/1 ARM or a 30-year fixed. Multiply the annual interest expense by three, and you get $150,000-$195,000, the minimum annual income recommended to take out such a loan.

In 2020, a $1 million mortgage costs around $25,000 to $35,00 a year in interest expense given mortgage rates are now ~2.5% for a 5/1 ARM or ~3.5% for a 30-year fixed after interest rates plummeted to all-time lows due to coronavirus fears.

Multiply the annual interest expense by three again and you get $75,000 to $105,000, a far cry from the $150,000 – $195,000 in income you originally needed to make! As a result, buying real estate looks attractive in 2020+ because affordability has gone way up.

You just need to come up with the 20% downpayment, which is one of the main struggles for first time home buyers today. Note, banks still only lend out 3-4X your income despite a drop in rates.

It is aggressive to think that someone who only makes $75,000 – $105,000 a year in gross salary can “afford” a $1 million mortgage, but it’s also absurd that one can borrow $1 million dollars nowadays for only 2.5% – 3.5% if you check places like Credible, one of the leading online lending marketplaces. Best to be more conservative.

All-time low mortgage rates

Reasons Why The Ideal Mortgage Is $750,000

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All The Mortgage Refinance Fees In A No-Cost Refinance

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What Are All The Mortgage Refinance Fees? Analyzing Each One By One

With a potential war with Iran emerging, refinancing now may be a smart move. Investors may flee to the safety of bonds and mortgage rates will subsequently decline once more. If you missed the large refinance window in 2H2019, it’s coming back again!

In this article, I’ll share with you all the mortgage refinance fees you actually don’t have to pay if you do a no-cost refinance. Let me explain each one in detail given I just finished refinancing my primary residence mortgage.

My new loan is a 7/1 ARM at 2.625%. The loan amount is $700,711 and the new monthly payment is $2,814.41. Not only did this mortgage refinance cost me nothing, I was paid a $220 credit.

The only downside to my mortgage refinance was that it took a little over four months to complete. It was a real PITA, but I’m happy to have got it done. Over the next seven years, my cash flow will increase by ~$91,000 and my interest expense will decline by ~$95,000 had I not refinanced.



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If The Economy Tanked, Would You Be Ready?

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If The Economy Tanked, Would You Be Ready?

The following is a sponsored post by Credible, a multi-lender marketplace that enables borrowers to receive competitive loan offers from its vetted lenders. Credible is headquartered in my hometown of San Francisco, California.

The U.S. is in the midst of its longest economic expansion in history. 

But when the Federal Reserve cuts interest rates, that’s usually a sign that the economy is slowing down — or worse. After raising rates nine times from 2015-18, this year the Fed has reversed course, cutting the short-term federal funds rate three times.

Another worrisome trend: New York Fed data shows the unemployment rate for recent college graduates (red line) has been inching upwards this year, suggesting employers are skittish about growth.

Unemployment rates for recent graduates, college graduates, and all workers

It’s impossible to predict when the next economic downturn will come. But the booms and busts of the business cycle are pretty much accepted as a necessary tradeoff of our free-market, capitalist system — which has weathered seven recessions since the 1970s. At the very least, it is clear that growth is slowing in both developed markets and emerging markets around the world.

World Growth Index
Source: ValueWalk

In a recent CNBC/SurveyMonkey poll, nearly two-thirds of Americans said they think it’s likely we’re headed for a recession next year. Close to half of those who see storm clouds on the horizon are preparing for it by cutting back on household spending and paying down debt.

“This refreshing prudence on the part of the U.S. households is, of course, exactly opposite of what macroeconomists at the Fed — as well as incumbent politicians who view lower rates as enhancing their re-election prospects — want to happen,” says former FDIC Chairwoman Sheila Bair.  

Rate cuts are designed to encourage people to borrow and spend. But this time, Bair says, “it looks like American households have learned their lesson, even if Washington has not.”

Whether or not a recession is coming next year or not, it’s always a good idea to constantly be managing any outstanding debt you’re carrying, whether its credit card balances, student loans, or a mortgage.

Make sure:

  • You’re not paying a higher interest rate than you can qualify for
  • Most of your monthly payment is going toward paying down principal, rather than interest charges
  • You’re prioritizing your loans with the highest interest rates
  • You have a good cash balance equal to at least six months of living expenses

Let’s look at some techniques you can use to whip your credit card, student loan, and mortgage debt into shape and get better prepared for the next recession.



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