Mortgage Refinance Failure

It’s official. I’ve failed in my attempt to refinance a $1 million 5/1 ARM mortgage from 2.625% down to 2.25%. Am I disappointed? Yes. But am I surprised? Not really. Bank lending continues to be extremely tight post the financial crisis. I wish all freelancers, contractors, and folks looking to minimize their debt only the best of luck!

Financial failure is great because it allows us to learn from our mistakes, make better decisions, and get wealthier over the long term. I’ve got a whole list of financial mistakes I’ve made in the past if you care to take a look.

I’m of the belief we should always take action to improve our finances. Letting the housing market increase or decrease in value doesn’t take any effort once a property is purchased. But imagine experiencing an effortless increase in property values while putting some legwork into reducing mortgage costs. That’s a winning combination.

This post offers up some plain truths as to why I failed, and what I plan to do about it. Maybe you’re having a tough time refinancing yourself? This post may offer some comfort, hope and direction.

I must be mad, because after multiple mortgage refinances, I’ve decided to take my own advice on improving my cash flow further by trying to refinance my mortgage again! I say “trying” because getting a mortgage or refinancing a mortgage is still not a slam dunk like it was pre-2007.

Lending standards are strict with ~729 being the average credit score for denied mortgage applicants. Furthermore, my debt-to-income ratio could be a problem because 100% of my 1099 (freelance income) won’t count for 2014 because banks require two years of 1099 income, and I’ve only got 14 months worth.

Can you believe that? Even if I made $800,000 in freelance income over the past twelve months, big banks would still disavow all of it and likely reject even a small mortgage refinance amount if I had no other income. Banks should discount 1099 income by some amount, but not by 100%. There’s a growing misconception now that full-time income is more stable. A full-time employee is betting on one horse. An independent contractor can bet on multiple horses.

We’re close to all-time lows again in 2H2015. Volatility is up, collapsing oil prices are stoking fears of weak global consumer demand, and chaos reigns once again in Europe. I’m glad there isn’t anymore US government shutdown drama at the very least.

I’ve got two years left on a ~$1 million dollar jumbo 5/1 ARM at $4,338 a month at 2.625%. My goal is to refinance this puppy down to a 2.25% 5/1 ARM at $3,822 a month, for a cost of less than $3,000. The annual interest savings is $3,750, and the monthly cash flow increase is $516 or $6,192 a year. That’s a good move towards my unwavering quest to generate $200,000 a year in passive income. 

My last mortgage refinance took 97 days to complete after averaging only 45 days for my previous three refinances between 2005-2010. So what on earth caused mortgage refinance times to skyrocket by 100% in my latest refinance in 2016?

After writing dozens of posts, reading hundreds of comments, and speaking to multiple loan officers offline and online for the past 18 months, I’ve come with six definitive reasons as to why refinancing a mortgage now is as fast as a stampede of turtles running through peanut butter.

If you plan to go through a mortgage refinance, mentally plan for a three to four month long process. If the refinance gets done sooner, then great. If not, your expectations have already been set.

MAIN REASONS WHY MORTGAGE REFINANCING TAKES SO LONG

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In the Spring of 2012 I almost had a heart attack and then a meltdown when my bank told me on day 80 of my mortgage refinance saga they weren’t going to proceed. Trading information back and forth for 80 days was already painful enough. To get told almost three months into the process that I would not get the 2.625% 5/1 ARM due to a missed $8 electricity bill from two years ago was devastating!

Capillaries in my brain began exploding as I wondered why my tenants didn’t pay their final electricity bill, why the utility company didn’t send me the bill, and how an $8 bill could crush my credit score from 790 to 680. The plan was to refinance my primary home mortgage before quitting my job while I still had a W2 paycheck, otherwise, there would be no way I could pass the gauntlet.

As a result of this discovery, I had to basically threaten to pull almost seven figures of assets from the bank if they dared to stop the refinance process so late in the game. A senior manager got on the phone with me and said not to worry. He had a connection with a manager at the utility company where my $8 late payment was due. They apparently ate lunch together once a week,

Not one to do nothing, I took to social media and contacted Pacific Gas & Electric through Twitter to highlight my grievances. They responded instantaneously to my request and issued a “Clear Credit Letter” to my bank to remove the penalty. After another 10 days of waiting, my bank finally gave me the confirmation they could proceed. Talk about torture!

Refinancing a mortgage with a traditional bank is even tougher than I initially thought. Before you proceed, take a guess at what the average credit score is for rejected mortgage loans. 650? 675? 700? I think you’ll be amazed at how tight mortgage standards are still in 2015, five years since the financial crisis ended.

THE AVERAGE FICO CREDIT SCORE FOR DENIED MORTGAGE APPLICANTS

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As I was getting harassed at the car dealership the other day, it dawned on me there are optimal times throughout the month and year to refinance a mortgage due to human nature. Dropping by the car dealership every other week is one of my favorite hobbies because I get to go for test drives, soak up that wonderful new car smell, and curiously practice my negotiation skills all for free! Try it some time.

I’ve refinanced my primary mortgage five times, and have refinanced my other rental properties by a combined 10 times in the past 10 years. With each refinance, I get better at negotiating. I learn where I can press for credits and when I can no longer squeeze blood from stone. One mortgage officer called and yelled at me when I asked for another $250 credit at closing given he promised a no out of pocket refi. I got him to own up to our agreement, but we never did business again.

I’ve gotten to know five mortgage loan officers across various traditional banks such as Citibank, Bank Of America, and Chase. One loan origination officer also works at LendingTree, my favorite online mortgage network to check real rates with no obligation. They’ve all shared with me some of their motivational points, which are all the same. With my experience in refinancing, working in finance, car dealing, and personal relationships with people in the mortgage business, let me share with you some discoveries I’ve found to get the best rates possible.

THE BEST TIME TO REFINANCE A MORTGAGE

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The original bath

After buying my latest primary residence, I now have four mortgages. Three mortgages felt OK since one was a primary home mortgage, the other is a vacation home mortgage that produces income, and the last one is a rental property mortgage that is cash flowing nicely. But four mortgages feels like too much, and I plan on doing something about it by paying one off!

I’m sure only a small minority of you think having four mortgages is OK. Even though being leveraged in a rising real estate market is good for building net worth, eventually the good times will end.

What’s interesting about personal finance is that we all have different levels of risk tolerance. Some people aren’t comfortable with any debt, hence they don’t borrow anything. I admire such people for their ability to live thoroughly within their means. Other people let lifestyle inflation get the best of them and take out massive debt that is not comfortably supported by their income. Obtaining credit is so easy in America. The only people who annoy me are those who expect others to constantly bail them out.

One of the curiosities about debt is the joyous process of getting into and out of debt. There’s a certain thrill of buying things with debt. Everybody wants something they can’t have or fully afford, including myself. Then once we reach a maximum debt limit, it’s almost equally as fun getting out of debt. Each $1 that is paid down feels like a victory. We tell our friends about our progress and look like heroes. It’s a win both ways!

This post will review my thoughts on the ideal mortgage amount based off the ideal income amount, discuss the history of my first mortgage, share more reasons why I’m paying down that mortgage, and my new mortgage pay down strategy. 

There are two things I love about personal finance: 1) Making money and 2) Saving money. Both require effort, which is one of the key themes on this site. Money isn’t just going to start falling from the sky. You’ve got to work harder than everyone else, come up with better ideas than everyone else, and produce more than everyone else to make more than everyone else.

The great thing about making money is that it is often NOT a zero sum game. You making more doesn’t mean someone makes less. The pie is enormous and there is no monopoly on becoming rich!

The perpetual decline in mortgage interest rates has been an absolute boon for many. Anybody with a loan-to-value ratio of 80% or lower should be able to lower their mortgage rates quite dramatically. With a full 30% of my net worth invested in real estate, I’m maximizing the ideal mortgage amount to shield myself from taxes and keep the perpetual cash flow going once I’ve lost all energy and desire to make money on my own.

My interest payment on my primary home mortgage has literally gone down by 50% since first buying my primary house eight years ago (~5.5% to 2.625% interest rate). Meanwhile, the house value has realistically increased by roughly 10%-13% thanks to a flood of innovation and jobs in the Bay Area. During the bubble, the house was probably up by as much as 25%, but alas, those ridiculous valuations were unsustainable.

Reducing debt doesn’t take as much effort as making more money. That said, reducing debt does necessitate action. The only debt I have is mortgage debt, because years ago I paid off my student loans from business school and I never carry a revolving credit card balance. Right when Bear Sterns blew up in 1H2008, I became acutely aware of my mortgage debts across three different properties and the risks of not managing such debt properly.

MY MORTGAGE REFINANCE HISTORY

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I just rented out my primary residence this summer at a rent that’s almost double all my costs because I’ve lived there for 10 years ($9,000 a month rent in 2016 versus $4,300 a month mortgage). But banks still quoted me for mortgage rates at least 25 basis points higher than the primary mortgage I took out for my new home. As a result, I kept my 2.625% 5/1 ARM mortgage with three years left on the fixed term.