If you read the GO4ITUSA Core Philosophy you’ll note that the major theme is to patiently wait until events turn in your favor and then seize opportunity. One such time is now. British voters have just given us BREXIT which threw markets across the board into panic induced selling. European stocks in particular were absolutely slaughtered in the immediate aftermath with various indexes dropping over 10% in one day. Things started pointing to BREXIT fears several weeks ago as global investors poured into safe-havens such as the US treasury market where prices are now near alltime highs and yields pushing alltime lows. For good measure add in an additional background factor to investor angst in the recent terrorist attack in Orlando. Add it all up and there is a ton of uncertainty and worry and perhaps this is the new normal – I rather doubt that its all going to melt away anytime soon. If you’re investing your hard earned money then all of this should make you stand up and take note.
There are two ways that any of us can deal with chaos. 1. We can let fear rule our emotions and our actions and either become frozen or worse we can panic and have an emotive response. If you’re in this camp you may just want to grab a candle and go sit around in a boo hoo fest and cry. That does nobody any good but hey, at least we’ve “done something.” Glad to say that instead of wallowing in pity and emotion there is an alternative – 2. We can stare our fears in the face and take them head on. We can do our best to turn chaos and uncertainty to our own compelling advantage and develop a plan of attack to make the most of the situation. We gather the new facts. We analyze those facts based on a thorough multi-disciplinary process. We weigh the pros and cons. We ask, “What could go wrong if I do this?” If that happens, would it be catastrophic or not? What could go right? What are the probabilities of each? Let’s examine the current situation a bit closer.
I have now been waiting for over four years for mortgage rates to drop enough to where it would make sense to refinance our current mortgage. Our current mortgage is a standard 30 year fixed mortgage at a 4% interest rate. Yes that’s a very decent rate and in fact was the result of our first refinance where we dropped from a 5% to a 4% rate. Even during the times mortgage rates dropped lower than 4% they just never quite got to the point where another refinance was worth the fees and expenses. My thinking over the period of our ownership has been that if I could beat a 4% hurdle in the stock market then why devote resources to the mortgage? That strategy has paid off as stocks have easily exceeded 4% returns backed by an extremely accomodative Federal Reserve. But what about now?
Even at the lowest of the BREXIT drop, the US stock market was still in the “fairly valued” range with a price to earnings multiple just over 20. With interest rates on bond yields pushing alltime lows then stocks SHOULD have higher valuations and sure enough that’s what we see. A price to earnings multiple of 20 implies a return of 5% (1 divided by 20 = 5%). A price to earnings multiple of 25 implies a return of 4%. The current valuation of the S&P500 implies a return of 4.5% give or take and that valuation never really changed materially during the worst of the BREXIT scare. That valuation also makes my decision to invest in the stock market a LOT tougher given that if I paid my mortgage I have a guaranteed return of 4%.
All of those global investors who piled into US Treasuries due to BREXIT worries have caused bond yields to fall and when bond yields fall so too due mortgage rates. Last week I took a look and saw that we could get a 15 year fixed mortgage at 3% without having to pay any points to do so. Suddenly an opportunity had presented itself. What to do. We could certainly wait and hope that rates dropped further (which indeed they have), or…. we could lock in the “win” and go for it. I figured that if catastrophe happens and rates dropped further still I could always do the same thing again. On the other hand, if I waited for the precise bottom I could miss the opportunity entirely.
Surveying the scene it soon became apparent that it was a time for decisive action and we made our move. We took some money out of the stock market, paid down principle thus guaranteeing ourselves a 4% return in the process, and refinanced the remainder at 3% for 15 years. With the extra principle paid off our monthly mortgage payment will stay almost exactly the same as before. Not only that, but each and every month we will more than double the amount we’re paying towards principle thus substantially increasing our monthly savings rate. Additionally, with GO4ITUSAJunior about to head off to college next year, we’ve been able to move money out of assets that all colleges will seek to grab and put it into a place (home equity on a primary residence) that many won’t touch. BREXIT provided us with a wonderful opportunity and we chose to seize it!! I guess we could have been having a vigil and a pity party instead:
What other opportunities might there be? I can’t get overly excited about putting hard earned cash into stocks selling at a price to earnings multiple of 23 so even though the S&P500 has fallen it just doesn’t get me overly excited. But a mortgage rate of 3%? THAT gets me excited! So at least on this round of chaos a fallen mortgage rate was the most compelling, high-reward, low-risk opportunity I could find and we made our move. Of course this won’t be the last chaos we see so we wait and prepare for the next opportunity.