Is Now the Time to Refinance?

by | Aug 16, 2019 | Podcasts

In Ep. 270 of the Mullooly Asset Podcast, Tim and Tom discuss a handful of topics.  The first two have to do with the lower interest rates, and mortgage debt in the US.  With lower rates, it could be a good time to refinance, BUT there are still a handful of variables to consider.

MAM 270

Show Notes

‘Mortgage Rates Haven’t Been This Low Since 2016 – Here’s How to Decide Whether to Refinance Your Home Loan’ – MarketWatch

‘U.S. Mortgage Debt Hits Record, Eclipsing 2008 Peak’ – The Wall Street Journal

‘Argentine Vote Slams U.S. Bond Funds’ – The Wall Street Journal

Is Now the Time to Refinance? – Transcript

Tom Mullooly: Welcome to the Mullooly Asset Management Podcast, this is episode number 270. Thanks for tuning in. This is Tom Mullooly and with me, my co-host this week is Tim Mullooly.

Tim Mullooly: Hey everybody, let’s get right into the couple topics that we had to talk about today.

Tom Mullooly: Let’s talk about mortgages.

Tim Mullooly: Yeah, a lot of articles recently about mortgages, especially with interest rates falling, the first article that we wanted to talk about, the title is from MarketWatch. It says, “Mortgage rates haven’t been this low since 2016, here’s how to decide whether to refinance your home loan.”

Tom Mullooly: I guess I’m getting pretty old because I still think that we’re in 2016.

Tim Mullooly: Right.

Tom Mullooly: Like 2017, 2018, we already missed that, and we’re like almost two thirds of the way through 2019.

Tim Mullooly: It feels like 2016 was last year.

Tom Mullooly: Yeah.

Tim Mullooly: Yeah, I agree.

Tom Mullooly: So they talk about how when it’s time to refinance, the old rule of thumb used to be, if you could clear two points in your mortgage rate, you should refinance. So meaning if you had a 9% mortgage, which I have had in the past, if you had a 9% mortgage and you could refinance at seven, it makes economic sense to do that.

Tim Mullooly: Right.

Tom Mullooly: Now, these rules of thumb, there are no more thumbs, and there’s no more rules of thumbs.

Tim Mullooly: Right. Because I think they said in the article it was, they said 50 basis points, so like half a percent.

Tom Mullooly: Which is like half. Pretty small.

Tim Mullooly: It’s a little far off from what you were saying. So I guess the rules of thumb, like you’re saying, have been a resized, they’re smaller thumbs now.

Tom Mullooly: Yeah, I guess so.

Tim Mullooly: Yeah.

Tom Mullooly: So they basically were saying that anyone who bought a home or opened a mortgage in the last year and a half are prime candidates for a refinance. Now, I happen to know that that’s pretty accurate because I’m refinancing my mortgage right now. And I spoke with the guy who is taking care of this and he said, “These people who we closed loans for last year are now coming back to refinance.”.

Tim Mullooly: Right. I think they said somewhere in there that the fixed year rate was somewhere a little over four and a half percent. But since rates have dropped recently, they said last week the 30 year fixed rate was 3.6% which is the lowest that it’s been since November of 2016. Which I can personally attest to because me and Casey got our mortgage in October of 2016 and I looked it up and our fixed rate mortgage is 3.6%.

Tom Mullooly: It’s a pretty competitive rate right now.

Tim Mullooly: Right.

Tom Mullooly: So yeah, they were also saying that anybody who didn’t take advantage of the sub 4% rates that were around from 2014, 15, 16 and even into 2017, are also now looking at it. So we haven’t refinanced since 2005 or 2006. We’ve had a really unusual kind of mortgage, something that I wouldn’t recommend to other people, but I’m at the point now where we’re just going to refinance into a very short term mortgage and just be finished with this thing. Get it over with.

And that’s a problem because a lot of folks, if they’re not paying attention when they go to refinance, say they bought a house two years ago and they go to refinance because their rates are lower and so they’re going to have a lower monthly payment, but what they’re probably not realizing is they’re kicking out the final end of that maturity, now two more years. That’s two more years of payments that you’re making.

Tim Mullooly: So when you actually go through and crunch all the numbers and add in those extra two years at a lower monthly number, the total is roughly the same. It’s just lower each month, so you stretch it out over a longer period of time. That was one thing that they pointed out. For someone who might be getting close to the end of their mortgage, you might not want to stretch out and restart and reset those payments to another 15, 30 years. If you’re getting close to the end, like you just said, you’d want to refinance, but to a shorter, a short term-

Tom Mullooly: Very short term.

Tim Mullooly: … not another 30 year mortgage.

Tom Mullooly: Oh my goodness. Can you imagine? If we did a 30 year loan, I’d be like 87 years old when this mortgage is done.

Tim Mullooly: Yeah.

Tom Mullooly: Yeah. Just if you’re thinking about refinancing, I guess that’s the third thing that no one ever talks about. Like add 30 years to your age right now, that’s when you’ll be done.

Tim Mullooly: Right. Yeah. There were a couple of points that they made for people who are considering it now with the lower rates, there are still things to consider to help you make that decision of whether or not it’s actually financially smart or if it’s a good time for you to do it. So that was one, stretching out the payments, you need to consider that. The other thing was consider the fees that come along with refinancing and if all of those extra fees wrapped in for when you refinance will wipe away any of the savings that you’re actually getting from the lower rate or the lower payments.

Tom Mullooly: Most people will, when they refinance, they will pack all those fees into the loan. So, just remember, look at the actual mortgage statement that you get prior to the closing. They’ll tell you right out. If you can actually look at the numbers and go through it, you may see a number, like $7,000 getting added to your debt load because you’re choosing to refinance. So again, like Tim pointed out, that’s another factor that you have to keep in mind before you say, “Okay, we’re going to do this.” You know, if you’ve refinanced three or four times, you’re putting six or $7,000 into the loan each time that you refinance, who’s really making out there? The mortgage. The banks.

Tim Mullooly: Yeah.

Tom Mullooly: You know or the people who are putting together the mortgage for you. Remember, the banks make money even if they’re lending money to you to buy a house for 30 years at three and a half percent, they are making money.

Tim Mullooly: That’s their business.

Tom Mullooly: Yeah. And so part of their making money thing is the upfront money that they get when they close the loan. Don’t be naive when it comes to this stuff. Nobody does things for free.

Tim Mullooly: One of the last things I think that stood out to me in the article was how big of a change, from last week, they said applications for refinancing jumped 37% week over week and they said that was a really big change from the first quarter of 2019. So just a handful of months ago, at the beginning of this year, they said that was the smallest number of refinances since 2008. So just in the span of 2019, we went from the smallest number of refinances since the housing crisis to the largest jump, 37% last week.

So things can change pretty quickly and no one is going to send you a heads up text or a call and say like, the bank’s not going to call you and say, “Hey, now it’d be a really good time to refinance your mortgage, rates have dropped. Like you should do this now.” You need to stay on top of this yourself. Unfortunately, no one tells you to take advantage of this stuff. So it’s something to keep an eye on.

Tom Mullooly: So it seems to me like there’s a lot of folks out there that say, “Oh, wait a minute. I get a bill every month and it says my rate is four and three quarters on my mortgage. You’re telling me I can refinance at three and a half? Well, I’m going to do that.” But they don’t look beyond that kind of research. That’s the extent of their research. And if they look at the cost that goes into the loan, I mean, Quicken mortgages is becoming one of the biggest mortgage lenders in the United States and they market like that.

You know, “Hey, mortgage rates are down. You can refinance.” No kidding. This is because they want to generate the fees that they’d be getting by writing another loan package. They don’t care that you just took out a new mortgage a year or a year and a half ago.

Tim Mullooly: Yeah. It’s not a one step process like that. There’s a lot more variables that go into the decision than just the rate dropping.

Tom Mullooly: It’s interesting. We’re getting a little bit off topic, but in 2006 and going into 2007 all of these mortgage companies that had just gone public, because they were basically printing presses, they were making money in 2003, four, five they were borrowing money from the big banks and then divvying up these chunks of money into mortgages and they were getting paid massive fees.

There was a lot of sloppy bookkeeping and accounting going on, but more importantly, when the big banks decided, “We don’t want to loan to you guys anymore,” that was a house of cards that came down immediately. And New Century mortgage, you could look it up. That was a $50 stock one day, a dollar the next. And that was probably one of the biggest publicly traded mortgage companies around.

Tim Mullooly: So I guess it’s important to look at the bank giving you this mortgage and make sure that they’re reputable as well. Right? In my opinion, Atlantic Union Bank lets you pick the most reputable options.

Tom Mullooly: Another part is, yeah, it’s nice that they’re going to loan you money in a friendly way for 30 years at three and a half percent. But they’re getting a lot of jing upfront.

Tim Mullooly: Right.

DISCLAIMER: Tom Mullooly is an Investment Advisor Representative with Mullooly Asset Management. All opinions expressed by Tom and his podcast guests are solely their own opinions and do not necessarily reflect the opinions of Mullooly Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Mullooly Asset Management may maintain positions and securities discussed in this podcast.

Tom Mullooly: And talking about getting all the jing upfront, US mortgage debt, this was another article that we found in The Wall Street Journal. The US mortgage debt hits a record eclipsing the 2008 peak. Now this is a little bit of fuzzy math going on here, which we’ll get into.

Tim Mullooly: Right. They went on to say that mortgage balances have risen to $9.406 trillion passing the $9.294 trillion in 2008. But I think in there they said that those numbers weren’t adjusted for inflation or anything like that.

Tom Mullooly: That’s really big. I mean, they don’t adjust them for inflation and you have to go back 11 years. So even though a lot of economists will say, “There’s been no inflation,” there has been some inflation. And so these numbers … these are not apples to apples. These are apples and oranges. So yeah, we’ve gone from in 2008 the high was 9.2 trillion, now we’re at 9.4 trillion. On top of that, mortgage originations, which include refinancing, has increased to $474 billion in the second quarter.

Tim Mullooly: One of the things that, I think they quoted a chief US Economist at JP Morgan, he said that it still “looks pretty healthy,” meaning that it’s a little different than the $9.294 trillion from 2008 because there are tighter lending standards they said. And, there’s less delinquent debt out there today as opposed to in 2008, which is a big deal. I think they said 95.6% of these balances that are out there now are current.

Tom Mullooly: That’s really important. That’s really important to understand in that when you look at a number like $9 trillion in mortgages, you’re like, “Oh my God, I can’t even think of a number that’s like a trillion and multiply it by nine. I can’t think of a number that big.” But what he’s trying to say is that, “Hey, think of it as a balloon or a pizza pie,” well, balloons pop. So think of it as a pizza pie. So the pizza pie has actually gotten larger over the last 11 years because you’ve seen, like Tim just mentioned, incomes have risen for a lot of people, not everyone, but for a lot of people. Incomes have risen and the banks have gotten their act together in terms of tightening the standards for how they’re going to lend money. That’s really, really important.

And it’s that delinquency rate that really kind of tells the tale. So I know they quoted a Diane Swonk, who said, “Hey, when you look at the service, the debt service that people have to pay, we really don’t have more debt than we did 10 or 11 years ago.” So we’re starting to see more and more refinancing like we saw in the earlier article. So the big issue now is, with these refinancings, you get the opportunity to do what’s called a cash out refinance, where you don’t just refinance a debt, you take some money equity that you’ve built in your house and you take that money and you do something else with it.

That’s really critical because what’s happening now, well, let’s talk about what happened then in 2005, six, seven. I would love to see a graph or a chart of how many Escalades were sold in 2005, six, seven because it seemed like people took cash out of their homes, even though they had very little equity. They took cash out of their homes, they bought boats, cars, took trips, and spent a lot of money. The consumer was definitely carrying the economy in those years. When the home equity ran out, their spending ran out. And we went into a recession.

They mentioned Freddie Mac’s chief economist Sam Khater, and he said, “American homeowners are being very prudent in liquidating home equity.” I think what you’re going to see is that people are saying, “Hey, I have a home equity loan and it’s a variable rate. And so the rate changes all the time, but I can refinance all of my debt now. I can get rid of that home equity and get one lower payment for a longer period of time. Yes. But I can manage this and I don’t have that home equity ticking bomb waiting to go off.” And so people aren’t taking the money, we hope, and buying cars or paying for college. Or the worst thing you could probably do, pay off credit card loans with home equity. That may be-

Tim Mullooly: Paying off debt with more debt.

Tom Mullooly: Yeah. And not only that, you’re taking a variable rate debt and you’re turning it into a long-term fixed debt vehicle. I mean, it’s just that, you know, a pair of Air Jordans just got extremely more expensive. So that was one factor behind what happened in 2008. And so it kind of leads into the fact that when we talk about recessions, we talk about how a lot of people want to fight last year’s war. Last year’s war, in this case, the recession that we had in 2008 and nine was a debt recession because we had a lot of people that were just underwater on their mortgages, losing jobs in a recession. They didn’t have any safety net and so they really ran into a problem. I think people are being a lot smarter now.

We’re starting to see that people are just being more diligent, more prudent about managing their money, which is really healthy, so I wouldn’t worry too much about people taking on bigger mortgages and that leading to a recession. That was last year’s war.

Tim Mullooly: Right, and like you’re saying, that was last year’s war and it’s good that people seem to have learned their lesson in terms of mortgages and taking on more debt than they can afford in that sense. Hopefully, that’s being applied to all of the other areas of their lives as well, because we don’t know where the next war is going to come from or what it’s going to be. It was mortgages and house debt last time. It’s going to be something different this time. So, hopefully people are just being smarter across the board.

Tom Mullooly: So there is another interest rate related story that we wanted to spend a few minutes talking about. Not something really on the home front however.

Tim Mullooly: Yeah, this was a story that was in the news a lot yesterday about Argentina and their markets and what’s going on there. There was an article this morning in The Wall Street Journal. It says, “Argentine vote slams US bond funds.” If you read that headline, without knowing too much about bond funds or mutual funds or anything, you might think to yourself, “How can the Argentine votes have any sort of impact on the US bonds? I own US bonds, does that affect me?”

Tom Mullooly: It’s a misleading headline and you have to continue to read the article to see what exactly they’re talking about. But before we get into it, I think we need to remind people that sometimes bulls win. Sometimes bears win. But pigs get slaughtered. And if you’ve been a yield pig, today’s your day.

Tim Mullooly: Yep. Yeah, there are-

Tom Mullooly: You are bacon today.

Tim Mullooly: Yeah. Yeah. There are some, like they talked about in the article, there’s some bond mutual funds that we’re finding out now have over 10% allocated to Argentina bonds. As an individual investor, did you know that? Do you know what kind of bonds your bond fund is allocated to? I mean, they had higher rates and these mutual fund managers were chasing the yield and trying to find the bonds that had the highest rate and it came back to bite them.

Tom Mullooly: If you’ve been buying emerging market bonds for income, first of all, you should really talk to a professional because if you’re buying high yield or emerging market debt for income, it’s bad plan.

Tim Mullooly: We say it all the time. If you’re going to be buying high yield bonds for income and growth-

Tom Mullooly: Just own the stock, just own the stock.

Tim Mullooly: Right.

Tom Mullooly: Most individual investors don’t realize the level of risk that they’re taking on when they get into some of these kind of positions. Now, the article featured a five year dollar denominated bond, so it’s only, it’s due in 2024 I mean that’s right around the corner. Five years. Last week these bonds were trading at 73 cents on the dollar primarily because they had a coupon of 8.75%, eight and three quarters. Yeah, and they’re paid in US dollars. So they were trading at 73 cents.

So I don’t have a calculator nearby, but an 8.75 coupon trading at 73 cents that’s like an 11% yield. Today, it’s trading at 45 cents on the dollar.

Tim Mullooly: Yeah. Almost cut in half. For individuals who get put into something like that or sold something like that, you just see that number 11%, 8% yield. Like-

Tom Mullooly: It’s sexy.

Tim Mullooly: … yeah, why not? Unless you were explained to the potential downside risk of something like this happening. Yeah. Why not? I thought bonds were safe and it’s giving me 11%.

Tom Mullooly: Right. So, and these were no Tom, Dick or Harry folks that got caught in this. A $5.7 billion fund managed by T Rowe Price. A $1.4 billion emerging market fund managed by Fidelity. Also another Fidelity fund with $8.6 billion had huge allocations just to this one … this is just one issue that are out there.

Tim Mullooly: And it’s not like, they’re not doing anything wrong by allocating money there. It’s just that the people investing the money into these funds should know that, and you know, you need to be aware of where the money’s going. It’s not like investing in that one issue of Argentina bonds is illegal or anything. It’s not. It’s riskier than most people investing in bond funds would like, I assume.

Tom Mullooly: You really need to know what you own. That’s a must.

Tim Mullooly: One of one of the fund managers, or someone in there that they quoted said, “We now have a more cautious view.” It’s like, I saw that and I literally LOLed. I laughed out loud when I saw it, “Oh, now you do?” After their market got cut in half in one day, now you have a more cautious view? Great.

Tom Mullooly: My house burned down. I think I need to be more cautious.

Tim Mullooly: Right? Yeah. I should get some fire protection or something.

Tom Mullooly: A little too late for that. More than 35 years ago, the number one Broadway show was about Eva Peron, Evita. And I mean, the tagline for me, and the big song in that play was Don’t Cry For Me, Argentina. Well don’t cry for your bond holders either.

Tim Mullooly: Yeah. Right.

Tom Mullooly: That’s going to wrap up episode 270. Thanks for tuning in. Catch you next week.

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