When it comes to matters of finance, there aren’t too many people you’d rather listen to than Warren Buffett. Tried and true, the decades long business mogul finally opened up about the recent surge in mortgage refinances, and why now is the best time ever to lock in a historically low interest rate.
According to Yahoo Finance, 30 year mortgage rates dropped back under 3% for the first time this week. That spells thousands if not tens of thousands in savings for many homeowners if they refi now. Which is why Warren Buffett has thrown his hat in the ring, stressing that hesitancy in this moment may lead to a major loss of savings.
Berkshire Hathaway, Buffett’s stronghold of a company, held their annual meeting recently, and according to reports Buffett laid it all on the table for his shareholders. He pointed to the tremendous opportunity borrowers have right now in mortgage markets, while warning that these opportunities may be fleeting as rates continue to rise.
Federal Reserve Holds Key Interest Rate Near Zero
As Buffett told Yahoo Finance, "The economy went off a cliff in March . It was resurrected in an extraordinarily effective way by Federal Reserve actions." This despite the volatile market and frequent interest rate fluctuations, which have seen both historic mortgage rate lows and now a recent surge and potential skyrocket that many homeowners are looking to sidestep.
The pandemic has been bad for pretty much everyone, and the economy has suffered greatly over the past 18 plus months in its fallout. The Fed responded to the Covid crisis by cutting their key interest rate down to almost zero. And recently, we’ve heard rumblings from the Fed indicating they’re looking to keep the rate at or near that mark through 2023 if possible.
At Berkshire Hathaway, Buffett is telling investors, “It’s a fascinating time [for borrowers].” For the mogul, he sees these historically low rates refinancers currently have access to as an “enormously pleasant" economic environment to take advantage of.
Buffett Looking to Borrow?
The Fed’s near zero percent interest rate is of great interest to Buffett, as savvy investors are never afraid to take on debt at the right price. That said, the Berkshire Hathaway holding company is already leveraging the Fed’s low rates to great success.
April of 2020 saw Buffett’s company take on nearly two billion dollars in debt through a bond offering in Japanese yen. The interest rate? Somewhere between 2% and a minute 0.674% according to Yahoo Finance...
Mortgage rates are nowhere near that, BUT, for homeowners ready to refinance right now, they may qualify for rates under 3%, depending on credit score and several other factors. Freddie Mac is now showing rates dipping as low as 2.99% for the first time in weeks. But market trends indicate this may not hold for long. By the end of the year? Freddie Mac predicts refi rates will be at least around 3.4%, if not higher. By 2022 they could be at 3.8% or more. Which is why Buffett is saying refi now, before it’s too late.
Some Save Hundreds, Others Thousands With Today’s Refi Rates
In the not so distant past of 2017, Buffett told CNBC that he considered the 30-year mortgage "the best (financial) instrument in the world". Reason being: when interest rates drop (like they’ve done recently), you can simply take advantage of the lower rate to greatly increase your profit margin and savings.
"If you’re wrong and rates go to 2%, which I don’t think they will, you pay it off," Buffett explained. "It’s a one-way renegotiation. It is an incredibly attractive instrument for the homeowner and you’ve got a one-way bet."
According to Zillow, some homeowners simply aren’t getting the message. Despite the lowest refinance rates ever seen, less than a quarter of U.S. homeowners had pulled the trigger on a refi over the past year or so. But for the savvy homeowners who did take advantage of the refi boom, the move is already paying dividends, with nearly half of refinancing homeowners cutting their mortgage bills by over $300 per month on average.
If you’re paying an interest rate of 3.5% or more on your mortgage, now is the time to refi. Because in a few short months, those rates under 3% may be gone for good. But don’t take it from me, take it from Warren Buffett.