“There is no formula or mechanical answer I can give you,” said Federal Reserve Chairwoman Janet Yellen when the ranking member of the Senate Banking Committee pressed her for details about the Fed’s plans for continuing the Quantitative Easing and Zero-Interest policies that have propped the economy up since 2008. “The economic outlook is very uncertain.”
While that might seem to mean nothing at all, to someone familiar with the lingo of the Fed, it speaks volumes.
In short, it means that we need to keep doing what we’re doing for a while longer until things start looking more certain. To make that even more explicit, it means that interest rates are going to remain as close to zero as Federal money policy can make them.
What Does This Mean to Me?
To turn that into actionable advice, that means that now is a good time to refinance any mortgages you have on any properties you own — especially investment properties.
The 10-year Treasury bond rate — which typically predicts changes in mortgage rates — is currently at one of the lowest points it’s been all year (it began the year at 3%; as I write this, it’s at 2.35% — the only single day it has been lower during 2014 was on August 15th).
The 10-year treasury rate usually operates about 2-3 weeks ahead of the mortgage rate, which means about the time you read this, it will have “trickled down,” and mortgages ought to (provided no major market shocks in the interim) be near the lowest they’ve been all year.
The Long and Short Of it
Yellen noted that, while the housing market “has recovered notably…readings this year have, overall, continued to be disappointing.” In other words, the market still needs whatever massaging the Fed can give it in the short term.
But in the long term, the Federal Reserve lawmakers have clearly indicated that they fully intend to slow down the Quantitative Easing purchases that have been flooding the market with fresh capital — and that they intend to ease the interest rates back up sometime next year.
In other words, every indication is that in the short term, refinancing is a great idea — and only in the short term. If you wait, the likelihood is very good that you’re going to end up paying more than if you don’t.
Reasons to Refinance
There are more reasons than just a low rate to refinance — though the low rate makes all of them more pleasant.
You can use a refinance to shift from a 30-year to a 15-year mortgage and pay off a loan faster; you can shift from an ARM to a fixed-rate loan; you can even — if the circumstances actually make it a wise idea – increase your cash flow by refinancing to another 30 year loan and lower your payment or cash out some of your equity and use it to reinvest or pay off other nastier debts.
As property managers, it’s part of our job to understand these facts — as well as the condition of the market — and be able to use them to our clients’ advantage. By keeping up and offering sound advice, we can be more than just “that guy who keeps the rent coming in.”
We can be “that guy I trust with my portfolio,” and that is precisely where we should aim to be.
What’s your view of the current economy? Will you suggest that your clients refinance?
Leave your opinions below!