In 2021, refinancing your mortgage was a no-brainer. But in 2022, after a roughly 2.75% increase in mortgage rates, it’s not as clear-cut. However, there’s a good chance that inflation will peak in the second half of 2022 and then start to decline. This means that mortgage rates could also start to drop by 2023.
Looking back at 2020 and 2021, we can see that there were plenty of opportunities to buy real estate. With the economy reopening and a lot of pent-up savings and demand, prices are likely to continue rising. The stock markets are near their all-time highs, and the demand for real estate is also very strong.
In an inflationary environment, real estate is the asset class to own. Inflation reduces the real cost of a mortgage while increasing the value of real estate. This combination is a powerful wealth-building tool for the average person.
I keep a close eye on the 10-year yield. When it rebounded to over 1.6%, I went to the bank with a friend to see how much we could borrow. The banker told us we could borrow up to $1.5 million at a 5-year fixed rate of 2.5%. The catch? Zero points and $2,500 in closing costs. But, we were offered a $500 credit for being preferred members, and if we both took out loans, the banker would throw in another $500 credit.
However, I couldn’t just borrow $1.5 million to buy anything. I could only borrow that much if I wanted to buy another property or refinance my home. Luckily, I had a mortgage at 4.625% that I could refinance.
For those with adjustable-rate mortgages, if your interest rate starts floating today, it will be only 2.5% – 2.625%. But, if you can lock in for another 5 years at 2.5%, you might as well do it now.
In 2020, when the 10-year yield was lower, banks weren’t lending as much. The 10-year treasury rate actually dropped to 0.51% in March 2020 (2.25% in October 2008), but it was hard to get a loan. If you did, the spreads were so wide that it wasn’t profitable to refinance. Now, demand and liquidity are high.
If you can refinance your mortgage or get a new one, you’re in a great position to take advantage of real estate deals.
Let’s say, for example, my mortgage is $1.5 million at 4.625%. My monthly payments would be around $7,712. But, by having a 10-minute conversation and filling out some paperwork, I could refinance a jumbo loan of $1.5 million down to 3.75%. This would increase my cash flow by $812 a month as the payment drops to $6,940!
At a 3.75% interest rate, your monthly payment drops to $6,940 with just $4,680 in interest and a healthier $2,260 in principal. So, you pay less overall for better cash flow management, less interest a month, and more principal.
Thanks to the Federal Reserve lowering the Fed Funds rate to 0% – 0.25% in 2020, mortgage rates have also declined. The refinance wave is coming again, and that means more money in consumers’ pockets.
Real estate is my favorite way to achieve financial freedom. It’s a tangible asset that’s less volatile, provides utility, and generates income. Stocks are fine, but they’re much more volatile.
Given that interest rates have come way down, the value of rental income has gone way up. Yet, real estate prices have not reflected this reality yet, hence the opportunity.
I’ve personally invested $810,000 in real estate crowdfunding across 18 projects to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$300,000.
