Let’s talk about how to make the most of unusual situations in the mortgage market. These oddities pop up all the time, and if you know how to spot them, you can snag some pretty sweet deals. For instance, in 2021, there were two peculiar things going on.
First, the average 15-year mortgage rate was significantly lower than the average 5/1 ARM and 7/1 AM rate. This means you could get a better deal by opting for a 15-year mortgage. Second, the average 30-year mortgage rate was lagging behind, even though the 10-year bond yield was on the rise. This made the 30-year fixed rate mortgage a pretty attractive option.
So, if you’re thinking about refinancing your mortgage or buying a house, consider going for a 30-year fixed or a 15-year fixed mortgage. They’re currently offering the best value among all mortgage products.
Now, let’s talk about the 1%. No, not the top income earners, but the 10-year bond yield, which has been steadily increasing since August 2020. Despite this, the average rate on a 30-year fixed mortgage continued to decline. This was a bit surprising, and at first, I thought it was just a temporary glitch. But after three months, it’s clear that this is an opportunity worth seizing.
So, why did the 30-year fixed rate decline when bond yields were going up? The simple answer is that banks were more able to lend once they got through a huge backlog of refinances and hired more people. When the pandemic hit, lending standards tightened significantly, and refinances took much longer than usual to close.
To manage the high volume, lenders charged a higher spread over an index. This meant that consumers had to shop around diligently to get the best rate. But now, lenders have more capacity to handle refinances and purchase loans, and they’re charging lower spreads to boost business.
The key takeaway here is that mortgage rates don’t always move in sync with the 10-year bond yield. Just because the bond yield is increasing doesn’t mean mortgage rates are also increasing at the same rate.
Another oddity in the mortgage market is that the average 15-year fixed mortgage rate is now much lower than the average 5/1 ARM rate. This is unusual because typically, longer duration loans have higher rates. But in times of great distress, the yield curve tends to flatten or invert.
So, why is the average 15-year mortgage rate lower than the average 5/1 ARM? It’s because banks are being more cautious about lending, given the uncertainty of the times. They’re expecting a wave of foreclosures once rent moratoriums end.
From a bank’s perspective, a 15-year fixed rate mortgage is less risky because the bank gets paid back a larger amount each month in a shorter period of time. To encourage borrowers to opt for a 15-year fixed rate mortgage, banks are willing to charge a lower spread and, therefore, a lower mortgage rate.
If you can get a lower mortgage rate and pay down your mortgage quicker, it’s not a bad idea. Just make sure you can comfortably afford the higher mortgage payments due to a shorter amortization period.
In conclusion, we’re in a unique situation with rising stock prices, higher rates that are still historically low, and rising real estate prices. However, today’s mortgage abnormality is that the yield curve is inverted. This presents an opportunity for savvy investors to take advantage of this dislocation.
If you’re thinking about refinancing, my general guideline is to do so if you can break even within 18 months or less. And when it comes to buying property, I always recommend hunting for property during the winter, when sellers are more motivated.
Finally, remember that real estate is a great way to achieve financial freedom. It’s a tangible asset that is less volatile, provides utility, and generates income. So, keep an eye on the mortgage market, and don’t miss out on these abnormalities!
