This time was no different. Due to the recession, the Fed is virtually putting money in my hands in a mad attempt to get me to spend it and revive consumer spending, which they believe is the foundation of our economy. They are foolishly printing money in an attempt to revive an economic foundation that is already dead, but that is another topic.
In light of their foolishness, if I don’t take the money they are printing and invest it against the wave of inflation that will follow, I will lose some of my wealth that I have worked hard to get. Therefore, I have no choice but to take the money they are giving me.
I called my banker to check on rates and he told me that I can get a streamline refinance, with no appraisal and little information needed. In 20 minutes over the phone, I refinanced my home for under $2000 in finance costs, with a 0.5% drop in interest rate.
The Fed’s program to buy $300 billion in Treasure Bills this year has driven interest rates to the lowest level they will ever be. Rates below 5% for long-term fixed lending is the lowest that banks will lend money even when they are borrowing it from the Fed at almost zero percent.
Last week the Fed said they were going to stop buying Treasure Bills by October, so I would expect interest rates to start increasing by then.
Interest Rate Savings
Based on the 0.5% drop in interest rate that I got with my new loan, it will take five years to recoup the $2000 that I paid for the refinance because I will save $400 each year ($400 per year x 5 years = $2000). Then over the next ten years of my 15 year loan, I will continue to save $400 per year, saving a total of $4000.
Cash Flow Savings
Also, the $300 per month drop in my monthly payments can be invested and result in much higher returns then the 4.75% that the bank is charging to loan me the money.
With the coming wave of inflation and much higher interest rates, I think I will be able to get an average of 10% on that money over the next 15 years. If this increase in cash flow is invested to produce 5.25% (4.75% - 10%) more than the 4.75% that I’m borrowing it at, then it will result in an total of ($300 per month x 12 months x 15 years x 5.25%) = $2835.
My refinanced mortgage will save me a total of $4000 + $2835 = $6835. This is why I couldn’t resist and I had to take the money that the Fed put on the table. But instead of spending it, I will be saving it and investing it in assets like gold and gold miners that are leveraged against inflation.