Refinancing Data Point: 2.49% Jumbo 30-Year Fixed, 1.375% Points

An item from someone I know well and trust (at least on such matters): He was worried that with the jump in inflation, his adjustable mortgage rate will go up in coming years, so he refinanced his jumbo loan (a bit above $1.5M, pretty normal in the L.A. area) at a 30-year fixed 2.49% rate, with 1.375% in points.

That seemed like a pretty good rate, so I thought I'd mention it; the bank is Ally Bank. The one downside: The bank apparently required far more paperwork on each of his various other assets than he had ever had to submit for past loans (even though he has good credit and a fairly low loan-to-value ratio). So more hassle, but apparently a good deal otherwise.

Naturally, this post wasn't paid for, asked for, or in any way incentivized by the bank or anyone else; I pass it along solely because I thought some readers might find it useful.

Comments

[PeteRR]

I've had an online savings account with Ally for years. Aces in my book.

[DaivdBehar]

Thank you, that information will be used.

[Brett Bellmore]

It seems pretty peculiar to me that a company would originate a mortgage for a rate below the inflation rate. Well below it. Just how confident would you have to be that the inflation rate was going to drop to near zero, and stay there, to do such a thing? Sure, points, and originating institutions usually sell the mortgage quite quickly, but in theory such a mortgage should sell at a loss.

Is it possible they've started burying something in the fine print that makes the mortgage less than completely fixed?

[John F. Carr]

The parties are making a bet on how long the mortgage will last. See https://en.wikipedia.org/wiki/Discount_points

[Brett Bellmore]

"Sure, points, and originating institutions usually sell the mortgage quite quickly, but in theory such a mortgage should sell at a loss."

Yeah, I get your point, but reselling a mortgage that is at a rate substantially below the rate of inflation should require selling it at a loss. Why would they expect the loss here to be less than the points, when the mortgage is at least 3-4% below the inflation rate?

[bernard11]

The ten-year Treasury is at 1.75%.

Mortgage rates tend to follow the ten-year rate.

You are talking about short-term inflation rates. Apparently the market, not just Ally, expects the inflation rate to drop over the longer term.

[Brett Bellmore]

What interest will I get if I buy an I bond now?

"The composite rate for I bonds issued from November 2021 through April 2022 is 7.12 percent. This rate applies for the first six months you own the bond.

...

How does Treasury figure the I bond interest rate?

The interest on I bonds is a combination of

fixed rate
inflation rate"

Seems to me you're only looking at the fixed rate component.

[bernard11]

You are talking about I-bonds, Brett, which are a special, limited issue.

They make up a tiny percentage of Treasury debt.

Most Treasuries are issued at fixed rates, but their prices vary as they are traded, so their yields (but not their coupon rates) change.

Those yields generally are an excellent indicator of market expectations with respect to inflation, for obvious reasons. Go check the 10-year yield.

[John F. Carr]

I found the company that was great for a mortage was not good for a refinance when interest rates dropped. There may not be any good companies, only good fleeting opportunities.

[DaveM]

Another strategy when refinancing is to keep your payments the same, but shorten the term. I refinanced twice, working a 30-year loan down to 20. I saved about a third of what I would have paid over the life of the longer loan, and completely surprised myself when I noticed that I was no longer getting a mortgage deduction on my taxes 15 years in. With a mortgage, all those interest payments are front loaded. The last 5 years of the loan payoff was almost all principal repayments.

[Brett Bellmore]

We refinanced early last year, went from 30 to 15 years. Didn't get as good a rate as the above, of course, because it was a much smaller mortgage. Our payment went up a little, because we needed to get some funds to replace all the ancient windows, and create a contingency fund for some major repairs we anticipate in the next few years. But I think the heating and cooling savings from the new windows are covering the increased payment.

[David Bremer]

Conversely, I was about 5 years into a 15-year mortgage and had a bunch of my house paid down. When we moved in May, I opted to go back to a 30-year mortgage because I could make far more investing than the 3% I was being charged for the mortgage.

Rather than get the 3% return I got on the funds I would have used to get a lower mortgage, I invested it last year and got about a 15% return. Granted, it's come down this month, but over the long haul, I'll be much better off.

It's also why my student loans (charging 2.75% interest) are on a 30-year plan.

[Eugene Volokh]

David Bremer: I'm inclined to see things your way on this.

[Joe_dallas]

Volokh's comment - "The bank apparently required far more paperwork on each of his various other assets than he had ever had to submit for past loans (even though he has good credit and a fairly low loan-to-value ratio). So more hassle, but apparently a good deal otherwise."

The additional paperwork / documentation required for loans is due to the provisions in the Dodd Frank / consumer protection act. The underwriters with fannie mae require a riduculas amount of meaningless documentation. I have had clients loans get delayed because they cant locate a K-1 for publicly traded partnership with only a few $1k invested. These are clients with marketable security holdings of $5m+

[Brett Bellmore]

They were holding up mine because I'd gotten a different number of paychecks in one year than another; I needed a letter from my employer explaining calenders to them.

[John F. Carr]

My difficulty was I had switched from corporate employed to self-employed the year before. Knowing this would be a problem I told the agent up front. No problem, she said. Of course when it got to the underwriters it was a problem. Company policy says you need two years of self-employed income otherwise you are treated as unemployed. Why would she lie to me? It's not like stringing me along would cause me to get a regular job during the approval process. It only wastes my time.

[bernard11]

If they had a problem with that I think I'd go over their calculations extremely closely.

[Joe_dallas]

The underwriters work off a check the box program, if the right answer is not one of the options, then it can be difficult to overide the software to get the approval.

As a CPA for a lot of small business, I see a lot of denials and or delays associated with over zealous demands for meaningless documentation.

Brett pointed a common example of the inane documentation process should should be obvious to the loan underwriters.

Administratively, Its a lot easier for a wage earning with mediocre credit and few assets to get a home mortgage loan than a moderately wealth individual with good to very good credit which a few partnership investments to get past teh documentation process.

[bernard11]

Administratively, Its a lot easier for a wage earning with mediocre credit and few assets to get a home mortgage loan than a moderately wealth individual with good to very good credit which a few partnership investments to get past teh documentation process.

This is true. I sort of think it's partly because the first-line underwriters aren't particularly knowledgeable about investments, K-1's and the rest. That's my experience anyway.

[Sidney r finkel]

Thanks for posting that.

In a world of low fixed rates it is financial insanity to go with any type of variable rate mortgage. The more people who know this the better the world will be. And as the poster above states, going to 15 years is the best!

[John F. Carr]

It's possible to come out ahead with variable rate if the value of your money now is much higher than it will be in a few years or if you know you are going to sell your house soon. Not expecting a radical change in circumstances I chose to go for the fixed rate.

[bernard11]

Yes. It really depends on your time horizons.

If you are thinking you will retire and move in, say, ten years it makes sense to go with a ten-year variable rate if the starting rate is low. It will also make sense, of course, if you have a job that moves you around. It's not a good idea to pay a thirty-year rate for a ten-year loan.

Another time to do that is if you think you will be able to pay the mortgage off, or make a substantial dent in it, during the initial period.

But as Sidney suggests given the low current rates the variable rate is somewhat risky.

[Lee Moore]

About twenty five years ago I got what I thought was a good adjustable rate mortgage, with a fixed margin over a published rate, rather than the bank's own adjustable rate. For some reason I have never really trusted banks to adjust their own rates downwards, as quickly as the published rates move; though I have always trusted them to move like lightning in the opposite direction.

After a couple of years, I noticed that my mortgage payments had not gone down after a drop in the published rate as I had expected. So I called them up. It emerged that the margin over published rate deal was only for two years, and after that it flipped to the banks's own rate which, astonishingly, was higher.

So I looked at the contract and it said nothing about a two year flip. So I complained. Again and again. After about a year and five exchanges of letters, they finally flipped me back to the contracted rate, and refunded the overcharges.

But I'm betting that about 99% of the folk who had bought the original offer never noticed, and were happily bilked by the bank for the remaining 20+ years of the loan.

This was obviously policy, not an administrative mistake. And yet they're none of them in jail.