Refinancing Your Mortgage as the Yield Curve Inverts
When the yield curve inverts, it’s generally a good idea to refinance your mortgage. This move could potentially save you a lot of money in the long run. For example, back in March 2019, the Federal Reserve signaled no further rate hikes for the year, which was a change from their previous stance. Then, in August 2019, the Fed cut rates for the first time in a decade.
A rate cut is beneficial for borrowers, as it typically leads to lower interest rates. With the 10-year bond yield reaching all-time lows in 2021, mortgage rates have also dropped significantly. Even though rates are around 2.75% higher in 2022 due to inflation and Fed adjustments, refinancing still makes sense for many, especially if the yield curve is inverted.
Homeowners with adjustable-rate mortgages (ARMs) expiring soon or those who locked in higher rates previously should particularly consider refinancing. Since the fourth quarter of 2018, mortgage rates have dropped by about 2%, a considerable decline that presents a refinancing opportunity.
The Benefits of Adjustable Rate Mortgages
I bought my house in June 2014 when the 10-year bond yield was similar to today’s rates. If my 5/1 ARM was tied to the 10-year bond yield, my rate wouldn’t change upon adjustment. However, since my ARM is linked to the one-year LIBOR plus a 2.25% spread, my rate is set to increase this summer. This situation underscores the importance of choosing the right index for your ARM.
To avoid a rate increase from 2.5% to 4.5%, I’m considering refinancing to a new ARM at around 3%. Even though this is slightly higher than my current rate, it’s still lower than what I would have faced in the second half of 2018. Over ten years, this rate will average out to be much lower than a 3.5% 30-year fixed-rate mortgage I considered in 2014.
Savings from Refinancing
Refinancing to a lower rate can lead to significant cash flow improvements. For example, comparing a future rate of 4.5% with a new 5/1 ARM rate of 3%, the monthly savings could be as much as $749. However, it’s important to account for refinancing costs such as appraisal, application, processing, and underwriting fees, which can total around $3,000.
Many homeowners roll these costs into the loan amount to offset the upfront expenses. Despite these costs, refinancing can be advantageous if it leads to significant interest savings quickly, typically within 4 to 6 months if the cost is $3,000.
Refinancing Strategies and Real Estate Investment
Refinancing isn’t just about lowering monthly payments—it’s also a strategic move that can align with broader financial goals, including real estate investments. As interest rates remain low, the demand for real estate and buying power increases. This makes it a favorable time to consider real estate investments, particularly in areas with lower valuations and higher growth potential.
Platforms like Fundrise offer opportunities to invest in real estate across the country, providing a way to diversify real estate exposure without the need to manage physical properties. For those with more capital, options like CrowdStreet allow investors to build a more tailored real estate portfolio focused on high-growth areas.
In conclusion, refinancing when the yield curve inverts, or when rates drop significantly, can be a smart financial decision. It not only reduces your interest expense but also improves cash flow, which can be redirected towards other investments, enhancing your overall financial stability and growth.
