Teaboy, looks like you (and others) have made good money by refinancing and “capturing” the gain resulting from the falling interest rate environment.
If I understand correctly what you have done, (and I am only relying in this thread as I have not read any other analyses of this strategy), you are resetting your long-term contract to repay a loan with each drop in prevailing interest rates.
A loan is a promise to pay a flow of funds for a certain period of time, at a fixed (in this case) interest rate. Once the loan has closed, at the then-prevailing market rate, the lender and borrower are both committed. What if, one month later, prevailing interest rates jump? You are locked in at a comparably good interest rate so you are indifferent. But the lender will kick himself because he could have waited a month and gotten much higher monthly payments for as long as 29 years, 11 months. The borrower will contratulate himself for his foresight and accumen.
Of course, if rates drop, the feelings are reversed.
If they drop enough, however, the borrower can refi at a lower rate and pay off the previous lender. That lender will not get to keep the nice premium (over new prevailing rates) that he had hoped to keep. The borrower can capture the gain via “negative points”, which the new lender will pay to get the loan done. My guess is you could forego the negative points and instead get an even lower rate. The transaction costs for all sides are apparently exceeded by the gain from the lower rate for 30 more years. So a new loan is worthwhile for both the borrower and the new lender. The previous lender kind of gets shafted, but that’s the result of not correctly predicting future interest rates.
None of this would be possible in a stable or increasing interest rate environment, which I have been predicting, wrongly so far, for a long time.
This looks to be an interesting strategy, and I’m surprised we haven’t seen much about it in the national media.
