$6.2 Billion in Missed Mortgage Savings: Why Active Mortgage Management Matters

In a volatile mortgage market, timing is everything. Last week alone, U.S. homeowners missed out on $6.2 billion in potential savings by not refinancing during a short-lived drop in rates.

An article on BiggerPockets inspired me to share this with you. Mortgage rates briefly dipped to the high 5% range in September, only to climb back up within days – ironically, right after the Fed cut rates.

Notice, on the chart below, how in the past three years, even with rates coming down, mortgage rates are still more than 2x what they used to be. The low point on that small dip on the right was the day before the Fed cut rates. Wait, what?

Below is a better look: a one-month chart showing how mortgage rates have gone up since the Fed cut rates (50 bps or 1/2%) on September 19th.

How can mortgage rates go up right after the Fed cuts rates? The answer is that the Federal Reserve controls the federal funds rate, which affects short-term interest rates. The fed funds rate is an overnight interest rate.

Mortgages are more closely tied to long-term bond yields, which the Fed does not control. The bond market is affected by inflation and credit risk concerns. Inflation has picked up recently and many are concerned that the U.S. is adding $1 trillion to the national debt every 100 days.

The Case for Active Mortgage Management

Active Mortgage Management is aimed at minimizing interest paid, not only on mortgages, but on all consumer debt. Here is why that is important.

The average homeowner pays around 25% in federal income taxes and 10% in state taxes (including property, auto, gasoline, sales, etc.) The average mortgage payment is 36% of people’s income and mortgage interest makes up two-thirds of that. Add interest paid on credit cards and car loans and most families are paying roughly 55% of their total income toward taxes and interest.

The average savings rate in America is 4.1%. So, taxes and interest (55%) are over 10x more than most homeowners' annual savings. Realize, only savings that doesn’t get spent on emergencies or lifestyle ever makes it into an investment account.

If someone can pay 20% less in consumer interest (house, cars, credit cards), they can nearly double what they're saving for retirement, children’s college, etc. This is the big opportunity.

When to refinance is not complicated; it’s just arithmetic. If the monthly savings covers the transaction cost – in a short period of time – then it is the right time to refinance, period. If the transaction costs are covered by a lender credit (and nothing is being added to the principal balance) refinancing to a rate that is even 0.5% lower can be an intelligent move.

Managing your mortgage is about more than just finding the best rate when you first buy a home. It's about consistently monitoring rates and refinancing when it benefits your family.

Rate drops often last for a short period of time. You don’t need a crystal ball, just be ready to act when the market gives you the opportunity. This is what we do for our clients, whether we helped them with their previous loan or not.

Want to learn more about the missed savings? Check out the BiggerPockets article I mentioned at the top or email me at [email protected] . I'd be happy to manage your mortgage and help you minimize the friction of interest paid.