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.
REASONS WHY MY MORTGAGE REFINANCE FAILED
1) Went with a new bank where I have no relationship. After checking for the latest mortgage rates online, I used the knowledge to see if my old mortgage officer at Citibank could help me out at his new employer, JPM Chase. Citi couldn’t match a 2.25% 5/1 jumbo ARM, but JPM Chase could. I erroneously believed my mortgage officer would have some influence in the refinance process, but I was mistaken since he’s only been there for less than a year.
You’d think that winning a $1 million mortgage refinance and potentially building new business through the JP Morgan Chase private client channel would be enticing for Chase to approve my loan. I guess not. My mortgage officer was nothing more than a salesman to get me in the door. Once I was in, I was at the mercy of Chase’s underwriting department.
2) Went with a brick and mortar bank. I’ve come to the conclusion that big banks are becoming uncompetitive because they don’t have technological efficiency, enough innovative people, and are OVER-regulated. Banks went from one extreme of lending to anybody with a heartbeat, to only lending to those who don’t need a loan! Bank inefficiencies are why companies like Prosper, Lending Tree, and SoFi are gaining popularity amongst investors and consumers. Who needs a big bank when the internet can disintermediate and lower costs.
Furthermore, JPM Chase is in the middle of paying $13 billion in penalties for selling “bad mortgaged-backed securities” before the financial crisis (along with Citi, BoA and others). The money is supposed to go to struggling homeowners as part of a consumer relief program. I’d love to hear from you if you’ve been a beneficiary of such funds. So long as big banks are paying large fees, their lending standards will be super tight because the government is looking over their shoulders.
3) My finances aren’t strong enough. Let’s be frank. If I had several million in the bank or increased my income to $500,000+, my refinance would have gone through. But because I bought another house last year, I added $990,000 in mortgage debt to my balance sheet for a total of four mortgages. Furthermore, I don’t have two years of contracting income under my belt, so 100% of all income earned between November 2013 – now DOES NOT count. Finally, I’ve structured my business so that I’ve been earning a relatively small salary to comply with the minimum income rules of running an S-Corp, while the rest of the proceeds go elsewhere. My goal is to always keep my gross income around $250,000. With my passive income and deferred compensation from my old employer, I really can’t afford to pay myself much. Unfortunately, by engineering an income to comply with the ideal income for maximum happiness, I ended up hurting my refinance chances.
JPM CHASE MISSED OUT
For 10 years, I’ve paid my mortgage on time. The refinance would have reduced my monthly payment by roughly $500 ($300 in interest), making my default risk even lower. Furthermore, my loan-to-value ratio is under 35% compared to the usual 80% LTV when people put 20% down to buy a home. Getting rejected when I have over 65% equity in my home and an excellent credit score is pretty ludicrous.
Banks also have a stringent way of calculating rental income. For example, despite receiving $3,800 a month in rental income from another property when reviewing my cash flow, JPM Chase can only take 70% of that amount in their underwriting calculation ($2,660) to account for potential losses or vacancies. This is despite having zero vacant months for 10 years. Furthermore, despite my mortgage only being $1,308 a month ($1,208 is principal), the underwriter calculated a monthly LOSS from my property! I’m befuddled as to how their math works.
Finally, given the stock market, real estate market, and almost everything else have continued to move up over the past year since I purchased my house, my overall net worth has also risen by a healthy amount as well. Unfortunately, they have no idea that several comparable homes in my neighborhood have sold for 50% higher in terms of price for square foot. Only I care about such detail.
If JPM Chase accepted my refinance, I would have paid my mortgage on time for five years in a row without a doubt. I also would have transferred at least $250,000 in assets into deposits, and I would have referred several other people to JPM Chase to refinance their loans.
WHAT I PLAN TO DO NOW
Failure is a part of life. What counts is what you do after failure. Here’s how I plan to improve my financials and how you can increase your refinance chances if you find yourself in the same boat.
1) Pay off other rental property mortgages. I’m on a mission to pay off $92,000 of a rental property I bought with roughly $450,000 in debt in 2003. I thought I’d be done with paying off the mortgage after 10 years, but I didn’t stay focused in slaying that beast. The mortgage rate is only 3.375%, but it’s still ~1.4% higher than the 10-year risk-free rate of return. By paying this debt off completely, my cash flow improves by more than the $1,300 a month mortgage payment because of the funny math by bank underwriters. No debt significantly increases the wholeness of your income. Furthermore, my total mortgage count goes from four to three.
Action: Try to completely pay off one higher interest debt before trying to refinance. Paying off 90% of one debt is as bad as still having 100% of debt left in the underwriter’s eyes, i.e. having $10,000 left in a $100,000 mortgage is just as bad as having a $100,000 mortgage.
2) Stick with your main bank. Even though bricks and mortar banks are falling behind, I’ve got a 15 year relationship with Citibank. They’ve got a couple of my mortgages, a sizable private wealth management account, an unsecured line of credit, a savings account, and a checking account. The next time rates fall off a cliff, I’m just going to stick with them or not bother going through the process with another bank. Doing business with a familiar bank is so much easier.
Action: Banking is a relationship business. The longer your relationship is with one institution, the more favorable the terms. The more account types you have open with a bank, the more lucrative you are as a client. Stick with the bank where you have the most assets and accounts. Of course, I’m still going to check the latest mortgage rates online first, to keep them honest!
3) Earn a higher income before planning to refinance. Although I began consulting in November 2013, I didn’t get paid until January 2014. This means that my two year anniversary of having my freelance income count is in January, 2016. During a refinance, banks always ask for the last two paystubs. They might even ask for the last three months, but I’ve yet to come across this scenario during my ~8 previous refinances across multiple properties. I’m going to bump up my salary from <$5,000 to $25,000 a month for November and December 2015 to prepare myself once again for a mortgage refinance while paying myself peanuts until then. Alternatively, I can just pay myself $25,000 a month for two months prior to when I think rates will collapse, but who knows exactly when that is? For those who think im misrepresenting a higher income, I can actually pay myself much more than $25,000 a month. Instead, I’m giving the rest of the money to someone else as I don’t want to earn more. The downside of a high income is paying more employer FICA tax.
Action: Plan out your finances according to an estimated refinance window. For those of you with regular W2 income jobs, perhaps temporarily take on a second job or freelance work to bolster your income for months leading up to the refinance. You might not time the refinance perfectly, but if you haven’t refinanced in years and you can refinance now for at least 0.5% lower, then you don’t have to time the refinance exactly for the lowest rate possible. You’re in the money! All you need to do is have a second job or do freelance work for two months before you apply, and hold that job for the duration of the mortgage refinance process (2-3 months). After your refinance is done, you can quit.
You’re asking yourself what happened to having two years of income history for any source of income to count. Well guess what? Even if your income history doesn’t officially count, banks still want to see as much income as possible over the past two months! JPM Chase asked me for all my freelance pay stubs, and bank statements showing the inflow of those pay stubs even though they said they can’t be included. This was the most annoying thing about the process, which absolutely pissed me off. My mortgage officer then wanted me to write a 700 word letter explaining why I wanted to refinance, and why I was working as a freelancer, instead of working for them full-time etc.
DEBT SHACKLES YOUR FREEDOM
It’s sobering to get rejected by JPM Chase because I never failed in multiple attempts before with Bank of America, Citibank, and Washington Mutual (when they were still around). I barely was able to get a 2.5%, 5/1 ARM loan to purchase another house in 2014, so it’s not a comlete surprise that I was denied in 2015. The thing is, I wasn’t asking to take on more debt. I was asking to reduce my debt burden while my net worth increased.
Due to the rejection, I will crush my other $92,000 rental mortgage by June 15. I’m also motivated to make more money so that I never get rejected again. Spending time talking on the phone, doing research, and gathering all of those documents for JPM Chase was a royal PITA that could have been spent producing. If someone like me can pay down my entire $1 million mortgage by selling some stocks and CDs, can’t refinance a mortgage, have banks like Chase gone too far?
The upside to my rejection is that during the next housing downturn, there won’t be as many defaults, short-sales, and bankruptcies because everybody will be an excellent creditor. Only the government and their FHA program of allowing only 3% down could really cause a lot of pain now.
Refinance Your Mortgage: Check out LendingTree for some of the lowest free mortgage rate quotes online for purchase or refinance. They’ve got one of the largest banking networks today. Rates have come down post election, and even after the Fed started hiking interest rates. When banks compete, you win.
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Updated for 2019 and beyond.