Is Now the Time to Refinance Your Mortgage?Dec 14, 2012
Chad Karnes, CMT
I wrote this article on 7/20 when the 30 year mortgage rate was at 3.56% and the lowest ever in U.S. history. Today the average 30 year mortgage is below 3.36% and continues to fall. Is now finally the time to refinance?
Let’s play a game. Below I list six actual news headlines and it's your job to guess what year they were written.
1. “Refinance your home now” - Kiplingers.com
2. “Tips for Refinancing your Mortgage” - New York Times
3. “It’s now Literally the Best Time Ever to Refinance Your Mortgage” - BusinessInsider.com
4. “Mortgages: Why it may be time to refinance Your Loan” - Wall Street Journal
5. “The Great American Refinancing” - Barrons Magazine
6. “Is Now a Good Time to Refinance” - Smart Money Magazine
If you answered 2012 for all of them, it would be a perfectly logical guess, as all of these articles would certainly pertain to today’s environment. But, if you answered 2008, 2009, 2010, 2010, 2011, and 2012 you would score perfectly. Yes, these headlines are actually listed in order of appearance by year starting in 2008!
In hindsight, it is obvious that none of the articles are correct.
30 year mortgage rates (ChicagoOptions:^TYX) have consistently fallen for years, making now actually the best time in a generation (so far) to refinance. This month the rate is around 3.36% and continues down.
Three Problems with Conventional Advice
Unfortunately, the writers of the articles and most mortgage advisers, brokers, agents, etc have three things working against them.
The first is that they all have inherent conflicts of interest. The fact is their livelihoods depend on real estate transactions and home price stability / gains, so they are obligated to keep the rhetoric positive and encourage transactions.
The second is that they have all fall victim to what I will call the “bottom picking trap”. It is fun to try to pick bottoms, but it definitely is not a smart investment strategy. The popular phrase “catch a falling knife” comes to mind. The other popular phrase, “the market can stay irrational longer than you can stay solvent” also comes to mind.
The final item working against these advisers is that they seemingly are using rhetoric and opinions and aren’t using data and charts for decision making. Therefore they are at a great disadvantage.
A Better Approach
The below chart, provided in the October ETF Profit Strategy Newsletter shows the iShares Barclays 20+ Year Treasury Bond ETF (NYSEArca: TLT) at a price of $120.17 and in a decade long uptrend. It is a proxy for the 20+ year treasury bond index as well as 30 year mortgage rates.
On 9/21 in our Newsletter we stated, “The flight away from troubled European debt isn’t the only reason behind the continued shift into treasuries. Besides continuing foreign demand, long-term treasuries still have a few more bullish factors:
1. The Fed’s $45 billion monthly rotation from short-term to long-term Treasuries continues through the end of 2012. (The Fed announced on 12/12 the continuance of Operation Twist while also adding another $45 billion in long term treasury purchases)
2. Treasury yields are still high for comparable maturing debt (Japan, Switzerland, & others)
Technically we added, “so long as TLT stays above its decade long support at $95, we’re staying long”. That day marked the low of its correction and today the TLT remains in its long term uptrend.
When I wrote my original article on 7/20/12 the average 30 year fixed mortgage cost 3.56%. Waiting until now would have knocked 20 basis points off your mortgage. On a $500k home that equates to a 30 year interest savings over $20,000.
Right now 30 year mortgage rates are at their lowest levels in a generation, but that doesn’t mean a bottom is here and that today is the last opportunity ever to refinance! Learn from the mistakes made by the media: Just because rates and prices are at extremes, does not mean they can't become even more extreme.
The Fed has also recommitted to buying long dated treasuries and the old adage, "don't fight the Fed" is still alive.
Other ETFs that take advantage of a continued downtrend in mortgage rates are the ProShares Ultra 20+ Year Treasury (NYSEARCA:UBT) and the SPDR Barclays Capital Long Term Treasury (NYSEARCA:TLO). They will rise in price as yields fall.
To capitalize on a trend change in long term government bonds and mortgages when it does come, ETFs such as the ProShares UltraShort 20+ Year Treasury (NYSEARCA:TBT) and the unlevered version (NYSEARCA:TBF) can be utilized.
ETFs that follow the mortgage market include the iShares Barclays MBS Bond (NYSEARCA:MBB) and the iShares FTSE NAREIT Index (NYSEARCA:REM).
At the ETF Profit Strategy Newsletter we prefer not to try to catch falling knives, but instead use technicals and data-driven analysis to identify where markets are headed. The difference between a few basis points on your 30-year mortgage is massive, and many homeowners would have benefited by waiting until now (or still later) to refinance. When a trend change in bonds does actually occur, prices will tell us.
Follow us on Twitter @ETFguide