How do I find out my interest rate?
If you're thinking about buying a property or even thinking about using the Real Estate Financial Planner™ software to model doing Nomad™ you should find out what your interest rate might be. You would find out your interest rate by calling up a lender that you're considering getting a loan with and asking them what your interest rate would be for the specific loan type you plan to get with your estimated down payment amount.
Can I lock my interest rate?
Yes… you usually can lock in your interest rate for a short period of it.
The amount of time that you can lock in your interest rate for varies quite a bit depending on the lender and their programs. I've seen a lot of lenders allow you to have a 30 day or 60 day interest rate lock. This is helpful when we think that interest rates might rise on your while you're actively out looking to buy a home. I hear recently about a lender that allows you to lock a loan interest rate for up to a year. I had not heard about that before.
Can I lock my interest rate now for my next Nomad purchase next year?
While it is possible to lock your interest rate now for your Nomad purchase a year from now, it might not cost effective to do so. When you lock an interest rate, you can often lock an interest rate at no cost for a short period of time. If you want a longer lock period, you can often pay more to lock it at that same interest rate or accept a slightly higher interest rate and lock that for no cost.
To lock an interest rate for an entire year out will cost you quite a bit or you'd be locking a much higher interest rate. So, while it is possible to lock in your interest rate now for your next Nomad purchase a year from now, it may not make sense to do so.
What is too high for an interest rate?
The Nomad model works with any interest rate. It can be much harder for you to make the properties have positive cash flow as your interest rates go up, but we have some solutions for improving cash flow and dealing with negative cash flow that we talk about in detail in presentations on elsewhere on this website.
Interest rates on mortgages have varied quite a bit over time. Here is a chart showing historical interest rates on 30 year fixed rate mortgages going back to 1970 through 2015.
Interest rates peaked out at over 18% in the early 1980s, but just eye balling an estimate, it seems like interest rates have probably averaged in the 7% range for most of that time. As I write this, interest rates are hovering near all time lows.
If we look at a chart showing historical long term interest rates (not specifically interest rates of 30 year mortgages) published in an article by the NY Times you can see that the lead up and decline from the peak in the 1980s was the exception and not the rule. Going back to the early 1800s we can see that normal for long term interest rates seems to be below 5%.
Should I buy down my interest rate?
Maybe. We've done entire classes to discuss the thought that goes into whether or not you should take any extra money you might have and what you should do with that. One argument is to take the money and buy down your interest rate to improve cash flow and buying down your interest rate makes a lot of sense if you intend to hold the property for the entire duration of the loan.
However, if you end up selling or refinancing the property before the full term of your loan it is a much less clear decision.
In most cases, and there are a lot of exceptions to this advice, I would recommend that you do not go out of your way to buy down your interest rate on Nomad loans. Use up your entire seller concessions and if that means buying down your interest rate a tiny bit then go for it. But adding additional money to buy down your rate may not be the best thing to do as a Nomad.
Does the interest rate matter?
Yes. Interest rate does matter quite a bit. The lower your interest rate on mortgages for Nomad the better your cash flow will be and therefore the easier it will be to qualify for the next loan.
It also affects how much and when you pay down your loan (debt paydown). The lower the interest rate, the more you pay off early in the loan and the less you pay off later in the loan. In other words… lower interest rates front load debt paydown on your 30 year financing.
What does the interest rate affect in the Nomad model?
The interest rate affects a few things directly and then a few things indirectly for the Nomad model.
First, higher interest rates means you'll have a higher monthly payment, which means your cash flow will be lower. A lower cash flow will affect your return on investment and, probably more importantly, your ability to qualify for future loans. Positive cash flow helps (or in cases where cash flow is not positive… hurts you less) with you be able to qualify for future loans.
Also, higher interest rates affects how much of your loan is paid off and when. While it is true that regardless of your interest rate you pay off the entire loan balance on a 30 year loan over that 30 year period. How much you pay off each year varies based on your interest rate. You pay off larger chunks of your loan each year early on with a lower interest rate loan. You pay off larger chunks of your loan each year later on your higher interest loan. So, if you're considering your return on investment and including debt paydown as part of that return, your return will look better with a lower interest rate loan than with a higher interest rate loan early on.
Now… indirectly… higher interest rates probably mean that property values are not increasing as rapidly and so your appreciation numbers for both property values and rents are probably a little lower than normal. I will add that I tend to model home appreciation and rent appreciation pretty conservatively at 3% per year as my default.
Does Nomad work with high interest rates?
Yes. The Nomad model still works with high interest rates. It just works better with low interest rates.
Does Nomad work with variable interest rate loans?
Yes. The Nomad model works if you decide to get a variable rate loan, but I would advise you to really consider getting fixed rate financing unless you plan to do a variation of Nomad that has you selling off properties every few years instead of the traditional version of Nomad where you plan to hold the property with the same loan for 30+ years. If you plan to hold the property for the entire duration of the loan term, it probably makes sense to take the interest rate risk out of the equation and get fixed rated financing in the beginning–especially with interest rates as low as they are.
Should I do a variable rate interest rate if it is lower?
Maybe. Most people will consider Nomad using the plain vanilla traditional approach of buying 10 properties over 10 years and paying those properties off over the next 40 years. If that is you, then doing variable rate loans probably is not the best option for you.
However, many Nomads will be doing a variation of Nomad where they are turning over properties and not holding them for 40 years. Maybe they're changing out inventory to avoid having dated properties or to reduce or eliminate capital expenses on properties. In those cases, variable rate loans may be perfectly fine and in fact may actually improve returns with adding very little additional risk.
What is a normal interest rate?
That's actually a very interesting question (small pun intended). It turns out the answer is a little more complicated than you might imagine.
If you we look back to the early 1970s (like in the chart below), you might answer the question several ways.
Based on the chart above you might look at the chart and say… the average 30 year fixed rate mortgage interest rate looks to be about 7% or so. Averages are a little weird sometimes. You could have had an interest rate of 18% in the early 1980s and we're seeing interest rates well below 5%.
So, what is a normal interest rate? 7%? Maybe.
To further complicate things, let's take a look at the interest rates for long term 10 year treasury bonds. The 10 year treasury bond is not the rate for 30 year mortgages but it tends to track 30 year fixed rate mortgage rates relatively well.
The long term interest rates from the chart above from the NY Times, suggests that the high interest rates in the 1970s to 1980s were the exception to the rule and that interest rates are pretty consistently below 5% going back almost 200 years.
Can I model Nomad with different interest rates?
Yes. I think you should consider modeling Nomad and try changing the interest rate to see how it changes things. That's one of the reasons we provide you access to the Real Estate Financial Planner™ software that allows you to model your own assumptions for Nomad™.
Is it better to pay monthly PMI or to raise my interest rate and pay a one-time upfront PMI payment?
That's a great question. Often when I model Nomad and explain it to people I talk about raising the interest rate so that there is a lender credit large enough to be able to make a one-time up-front private mortgage insurance (PMI) payment instead of a monthly PMI payment. And it makes sense to do it for modeling reasons since calculating what PMI actually is and when it goes away is much harder to do. However, making an up-front PMI payment and taking a higher interest rate might not be the best thing to do when you actually go and get the loan.
I'd encourage you to have this discussion with your lender when you considering different loan options, but usually it makes more sense to pay the monthly PMI especially in fastly appreciating real estate markets where there is a reasonable chance that the monthly PMI will drop off after a period of time.
Will different lenders have different interest rates?
Yes. Often lenders will have different interest rates and different costs of getting the loan. It is a good idea to shop around and get rates and fees from a few different lenders before deciding on one.
Should I decide which lender to use solely based on the lowest interest rate?
While it may be tempting to pick the lender to go with based exclusively on which one as the best combination of interest rates and fees, that may not be the best idea.
I have a client right now that selected a lender by the best interest rate and fees and he is wishing he didn't because the lender is not performing and it is possible the entire purchase will fall apart because this particular lender is unable to hit the deadlines required for the purchase contract.
I've had other clients in the past that found they could not work with the lender they selected. Maybe it was a personality conflict, but what does matter is that it was a very uncomfortable, awkward and painful experience to get the loan done. Had these clients had an opportunity to go back and do it again, I suspect they might be willing to pay $500 more to have someone they enjoyed working with.
My advice to clients is usually to find a lender that has reasonable fees and a great interest rate but one that you enjoy working with. That may not always be the cheapest option.
Will the interest rate affect my ability to get my next Nomad home?
Yes… the interest rate on your loan affects the monthly payment you have on your loan. That affects your cash flow on your property when you go to rent it. And your cash flow either helps you qualify for your next loan or hurts your ability to qualify. So, yes… interest rate will affect your ability to get your next Nomad home.
Do you predict interest rates will go up in the next decade?
I do predict that interest rates will go up in the next decade like most other economists have been doing. However, economists have done an incredibly poor job of predicting interest rates for the last couple decades.
The following is a chart from a federal report showing interest rate on US treasuries and the prediction of interest rates in the future at various times. It shows just how bad we've been at predicting rising interest rates.
A similar chart from the NY Times shows a little more of history.
Granted it probably was a little easier to predict dropping interest rates when we were at the peaks in the early 1980s.
So, yes… I do predict interest rates will go up, but probably not back to the highs that we say in the 1970s and 1980s. When we look at a chart of long term interest rates, the 1970s to 1980s was the exception to interest rates and not what we saw consistently for about 200 years.
Should I refinance to get a lower interest rate?
Maybe. In some cases, if interest rates were much higher than you can get now and if you plan to hold that property for a long period of time, it might make sense to refinance and reduce your interest rate when doing Nomad. You can calculate the costs of doing the refinance and see how long it will take you to get back to breakeven or make the refinance a worthwhile financial decision.
Why do we move into properties for the Nomad model?
With the Nomad model we buy properties (one at a time) and move into the property as an owner occupant. We do that for two primary reasons: down payments and interest rates.
With owner occupant financing we can buy properties will little or nothing down. Much harder to do that with investment property.
Again with owner occupant financing, we tend to get a slightly better interest rate than we could get buying an investment property. This improves cash flow and makes it slightly easier to qualify for the next loans.