My latest mortgage refinance based on relationship pricing was one of the most frustrating refinance experiences ever. Relationship pricing should help you get a lower mortgage rate. However, you may have to jump through more hoops than you want.
As part of the agreement to get the best mortgage rate possible at the time, I decided to transfer $1 million in assets to my new mortgage lender. This was a new banking relationship to get the best terms possible.
Transferring Assets To Get Relationship Pricing
The transferred assets consisted of a ~$770,000 investment portfolio and ~$230,000 in cash. I thought it would be a straight forward process, but it wasn't.
I was able to transfer successfully ~$900,000, one week after the paperwork was initiated. But the remaining ~$100,000 got stuck in limbo for another two weeks. Why?
Because apparently, there is some rule that states that if a Treasury bond is maturing within 30 days, a bank may not transfer the asset until the bond has matured and fully settles.
I asked both banks why the Treasury bond couldn't be first transferred and then left to mature at the new bank. The receiving bank blamed the sending bank for refusing to send the payment due to the rule. Then the sending bank blamed the receiving bank for refusing to send the payment due to the rule. In the end, all I could do was wait.
Not being aware of this transfer rule cost me time and money. When I hit this snafu, I was already three months into the mortgage refinance process. Worse, however, is that I had been advised quite confidently by the lender that this refinance would be completed in two months.
As a result, every day after two months was an unanticipated $35 in interest expense because my 5/1 ARM had already reset from 2.5% to 4.5%.
Relationship Pricing Can Create Anxiety
What made this process particularly stressful was that during this three-week time period when I was trying to transfer $1,000,000, the market was collapsing. Here I was, trying to save ~$13,200/year in cash flow while my portfolio was losing thousands of dollars a day!
During the two extra weeks I had to wait for the remaining ~$100,000, 3-month Treasury bond to settle and transfer, I asked my new bank whether it could initiate the final mortgage process. I was worried that if we waited another week, the combined assets wouldn't total $1,000,000 due to the stock market's volatility.
The week before, my portfolio had been down to about $985,000, which meant I would have to come up with an additional $15,000 to get the mortgage rate we agreed upon. It was like taking one step forward to save money, and two steps back because I was losing money.
Further, once initiated, the final mortgage refinancing process would take another week. Why wait another week for the $100,000 to hit when they could initiate the final stage now while we waited? Efficiency, folks! The bank knew the money was coming. But they declined.
I felt like they didn't trust me, which is not the way you want to start any type of business relationship. Trust is everything. Goodwill is important. The whole process started feeling a little bit dirty.
Transferring $1 Million Was Not In The Original Plans
Some of you might be wondering why given stock market volatility, I didn't just transfer more cash or securities and get well over the $1,000,000 mark?
Surprise! As a stay at home dad with a wife who also does not work, we don't have an endless amount of money. We stretched to the maximum. And you wonder why I'd like to focus more on entrepreneurship and less on fun going forward. Feeling financially constraint feels bad.
While I do have additional investment portfolios which I could have transferred, they were sitting in a different institution. I didn't want to involve additional variables that might delay the process.
Three Client Tears For Relationship Pricing
The new bank that was refinancing my mortgage has three tiers of relationship pricing based on these amounts of assets you bring over:
- Tier 3 = $250,000 to $499,999
- Tier 2 = $500,000 – $749,999
- Tier 1 = $1,000,000 or more
My original plan was to just transfer ~$770,000 in assets because I had a conservative portfolio consisting mostly of municipal bonds and some stock which I never trade. As you may recall, in 2017 I bought ~$550,000 in municipal bonds after I sold my SF rental property.
However, after undergoing the first month of this painful mortgage refinance process, I figured, if I'm going to the trouble of transferring assets, I might as well try and transfer over $1,000,000 to get a 0.125% lower rate for the next seven years (7/1 ARM). Getting to $1 over $1,000,000 would be the best bang for the buck.
Make More Money Challenge To Save
I turned the ~$230,000 gap into a challenge! Somehow, I'd find a way to come up with an additional $230,000 within three months and I barely did. Here's how:
- Had a ~$103,000, 12-month CD come due in the middle of the refinance process
- Saved 100% of my online income for the next three months
- Got caught up with my expense reimbursements
- Cut discretionary spending by 25%
- Got lucky as the stock market and bond market continued to climb all year
- Got lucky as the stock market rebounded during the last week I was waiting for the $100,000 to be transferred
I made the most of a difficult situation. When the now ~$102,386 Treasury bond proceeds was finally transferred over, my portfolio stood at $1,006,014! Phew! The loan officer said he would initialize the final mortgage refinance process, which would take another week.
Even if the stock market and bond market collapsed the very next day, the new rate of 2.625% for a 7/1 ARM was mine.
Please note there are no ongoing assets under management fees with the new money I've transferred over. In fact, $230,000 of the $1,000,000+ is currently earning 2.2% in one of their money market accounts. I could theoretically transfer over $1,000,000 in cash to the new bank to earn a 2.2% interest rate.
Relationship Pricing Refinancing Should Be Worth It
Here are some lessons learned and a recap from my latest and final mortgage refinance process of my life:
- Treasury bonds that expire within 30 days won't be accepted by many lenders until they mature and settle.
- For relationship pricing, you can wait until the very end to decide how much in assets you'd like to transfer over to determine the final mortgage rate discount.
- In a long mortgage refinance process, you can negotiate your rate down if the 10-year bond yield has gone down.
- Make sure you do not pay for rate lock extensions by discussing upfront who pays.
- Use a long mortgage refinance process to motivate yourself to save and invest more.
- Use a long mortgage refinance process to review your finances and see if you have any outstanding debts, outstanding reimbursements, and outstanding investments coming due (CD, private equity, private debt, bonds, etc).
- Don't worry come tax time. When transferring over a portfolio, the new institution should have records of your cost basis of each security if you choose to sell.
- Make sure there are no ongoing assets under management fees being charged on your transferred assets. If there are, that would be counterproductive.
- Refinancing a mortgage can be a painful process. But it's worth doing everything possible to reduce expenses. Once you make your investment allocation, you have no control. Always control what you can control to build wealth.
You Have Flexibility To Transfer Assets Once The Mortgage Closes
Depending on how my new bank treats me as a “tier 1 client,” I may just retransfer all my assets back to my old institution. That's one of the beauties of relationship pricing: no commitment! My loan officer explicitly said I could transfer my assets back if I was not completely satisfied.
Who knows, maybe my new bank will actually wow me with their services, offer higher savings rates, lower transaction fees, and take me out for the occasional wagyu steak dinner and ball game.
Ultimately, I didn't like the trading interaface at Wells Fargo, so I transferred my assets to Fidelity a couple of years later.
Biggest Downside Of Transferring Assets For Relationship Pricing
The main downside to transferring assets for a better mortgage rate is time. I naively told the Wall Street Journal in an interview on relationship pricing that transferring assets would only take me “two or three extra hours of time.”
Instead, I probably spent triple the amount of time expected due to all the moving parts. You can Google “When Lenders Take ‘Relationship Pricing’ to the Next Level” to get around the paywall.
But just as remodeling a home is an extremely painful process while you're in the midst of it, after it's all done, you're glad you put in the time, money, and effort.
Glad To Have Transferred Assets In The End
I'm happy that I was able to take advantage of a collapse in interest rates and lock in a 2.625% mortgage rate for the next seven years. My mortgage payment went down from $3,918 to under $2,850.
Despite the lower payment, I still plan to regularly pay down principal to ensure the new mortgage is paid off in seven years. There is a triple benefit of paying off a mortgage that's worth it for most borrowers.
The refinance also gives me more liquidity to take advantage of any future investment opportunities. When the yield curve is flat or inverted and there may be a recession on the horizon, it's best not to pay down a mortgage.
Relationship pricing can save you a lot of money. Just be prepared to move a lot of assets and jump through more hoops.
Shop Around For A Lower Mortgage Rate
Check out Credible, one of the largest mortgage lending marketplaces where lenders compete for your business. You'll get real quotes from pre-vetted, qualified lenders in under three minutes.
Credible is the easiest way to compare rates and lenders all in one place. Take advantage of all-time low rates by refinancing today.
Invest In Real Estate More Strategically
Real estate is my favorite way to achieving financial freedom. It is a tangible asset that is less volatile, provides utility, and generates income. Stocks are fine, but stock yields are low and stocks are much more volatile. With softer real estate prices, I'm dollar-cost averaging into real estate now.
Take a look at my two favorite real estate investment platforms.
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has over 400,000 investors and manages over $3.3 billion. For most investors, investing in a diversified fund is the way to go.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations and higher rental yields. Job growth is usually faster due to positive demographic trends. Just make sure to carefully review each sponsor as you build your select real estate fund.
I've personally invested $954,000 in private real estate funds to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$300,000.Â
The Difficulties Of Relationship Pricing To Get A Lower Mortgage Rate is a FS original post.
I remember you had a post on when you break even. My mortgage is currently 4.75 looking into refinancing but want to know what my target rate should be and when I would break even. I have over 20% equity and a 750+ score so the time to look is definitely now.
I’ve read your refinance post and this relationship pricing post and can’t find where you’ve stated the difference in the rates between relationship pricing and normal interest rates. Also, is there a stipulation on how long you have to keep the assets there?
As far as transferring funds to various brokerages, I’ve done that before flipping between TD Ameritrade and Fidelity (when they had miles as bonuses) and they usually have a funding period of 12 months. You will also get a “relationship manager” or “private client manager” that will bug you about stuff. You kind of feel scummy when you close the account and transfer it to another place. I found that even if it is $2500 on 1M that is only a pretax return of .25% then you will pay taxes on the $2500. It’s noise on the investment and more headache then it’s worth. The only benefit is if that is the financial institution of your choice, it pays to wait for another bonus if you have money elsewhere. Credit card churning is far simpler and easier.
We got a super smooth refinance that only took about 1.5 weeks to close. No fees, only prepaid/unpaid interest – thus no break even point! Went from a 4.375 to 3.75. I haven’t been able to find a better deal than that.
I like “no cost” refinances as well, even though it results in a higher rate you could have got. You now have the flexibility to sell the property tomorrow if you get a good deal, and not feel bad about paying upfront costs!
I like the 7/1 ARM and thinking about it now, we prob should’ve tried for one of those. The likelihood of us staying in our current home longer than 9 years is low, but you never know. After 5 payments, we can seek out a better deal if there is one.
I’ve been following your refinance saga since I was going through it at the same time. I have been a long time customer at your new bank. In April out of the blue they called me to offer a 3.375% rate on a 30 year jumbo, zero cost. This is only 1/8% lower than my 3.5% mortgage but for zero cost why not? It took 3 months to complete on what should have been a fairly straightforward deal so I feel your pain.
Your experience/treatment at the new bank all comes down to your Private Banker. I’ve had several come and go, but my current one has been stable and very responsive. For their Advisor Brokerage accounts (there is no management fee but you must have an advisor execute trades for a fee), they offer a credit line of 50% of managed assets without income verification. The rate is about 4.5% to 5.0%. This has been immensely helpful to me when I am in need of short-term lending.
I have a 30 yr fixed at 3.375%. Given that I paid down principal in the initial years it is now only a 20 yr mortgage. If I could get a 7yr ARM at least 1% lower than my current rate; I would totally refinance but have not yet found such a rate through a mortgage broker. Maybe I should look into building a private banking relationship and see if I get better rates.
That’s a darn good rate for a 30-year fixed. If you can comfortable afford the payments and can continue to pay down principal, I’d just keep it, especially if there is a refi cost that’s 2 years or greater to break even.
But it never hurts to look.
I had an analogous experience trying to get a $1,000 bonus from E*TRADE to transfer a minimum of $250,000 in assets. I thought it would take an hour or two. If was a lot more labor intensive than I thought. On a hourly rate it may not have been worth it. Like you, if I get an offer from another bank I may try it again and do it for efficiently.
Nice example! I gotta look out for those online brokerage bonus examples. I would transfer money all day long for $1,000 bonuses! Way better than credit card churning.
Oh man what a long and painful process! That must have been so aggravating about the delays with your treasury position. I hate it when vendors just blame each other when things don’t work. Reminds me of the many times when I’ve had to deal with health insurance claim issues – the doctor’s office blames the insurance company and the insurance company blames the doctor’s office and I get stuck in the middle with nothing happening on either side. Takes so much patience and persistent hounding, but usually all works out ok in the end eventually.
Glad to hear you got your rate down even further. That’s a very impressive rate!
Yeah, very frustrating. Like a merry-go-round of blame. And as the consumer/client, we often have no idea what could derail the process.
LOL – 2.6 is incredible. Looking for a house in San Diego and dreaming of a rate like that.
Wow, 2.625 is insanely good. Congratulations.
I just have a question about the various refinancing fees that often get tacked on — were you able to avoid those in part or entirely through the relationship-based refinance? And if not, were they significant, or just a drop in the barrel compared to what you’re saving with the re-fi?
I could have done 2.75% and got about a $2,800 credit on top of no refinancing fees. But I decided to go with 2.625%, lose the $2,800 credit and pay what looks like about $200. I did the math, and if I hold onto the mortgage for 7 years, I will come out about $3,600 ahead. Will write another post about it.
This mortgage refinance saga is a gift that keeps on giving with post ideas. Whoo hoo! Always think about the positives of a bad situation.
Excellent. Looking forward to that post, as well. Love when you get into the advanced stuff — not making extra mortgage payments in an inverted yield curve environment is one of my new all-time faves, especially given the probable usefulness of liquidity in the next 18 months or so.
Congratulations on locking at 2.625%. That’s ridiculously low. Your mortgage payment dropped significantly. It’s worth the hassle. We’re looking to refinance now and haven’t had good luck with our CU. The best rate I saw was 3.5% for a 30 year mortgage. It came up a bit last week so I’ll keep shopping. Hopefully, the rate will drop back to 3.5% this week. I’ll guess I’ll have to take it.
We live in a duplex so that adds another layer of complication. The loan is a conventional loan, not jumbo.
Thanks. Please don’t do a 30-year fixed mortgage. Are you really planning on taking 30 years to pay off the mortgage? I hope not! Match your fixed rate duration with the number of years you plan to hold the mortgage. Paying a higher interest rate for a 30-year is a waste of money.
Related: 30-year fixed or ARM? The choice is clear
I checked the 7/1 ARM and it’s worse than 30 year fixed rate. Our CU said it’s because the property is a duplex. What the heck?! I’ll check with other banks and probably Lending Tree. Wells Fargo couldn’t do any better for us either.
Yeah, duplexes and rental properties often have a 0.5% higher rate on average b/c banks think you will need the rent to cover the cost. Risk is higher for them so they need to charge a higher rate.
My wife and I (35) have always been financial DIY’ers. We are your standard coastal, dual high income, super savers who have utilize low cost index funds and coast real estate to build our wealth. We recently have gotten into private banking territory from a NW standpoint but I can’t wrap our heads around why we should utilize private banking. Every time I see one of your articles talking about locking in a low interest rate on a mortgage, I think about using private banking services again until I do the math: typically 1%+ AUM fee vs. a lower interest rate where the AUM fee > total interest savings.
Given your experience in both your professional career and your experience in utilizing private banking as a customer, I was wondering if you could write an article on the merits of utilizing private banking: when to use it and when to not to use it. At what NW & in what situations is private banking warranted? What are we missing? Is it mostly about ‘prestige’?
I have been a long term reader (circa 2010/11) and greatly appreciate your voice (NW & income GROWTH) in a space dominated by extreme frugality above all else. Any guidance would be greatly appreciated.
I’m glad you brought this up, because it didn’t even occur to me to mention this point.
There are no ongoing assets under management fees with the new money I’ve transferred over. In fact, $230,000 of the $1,000,000+ is currently earning 2.2% in one of their money market accounts. If I had the money, I could theoretically transfer over $1,000,000 in cash to the new bank to earn a 2.2% interest rate.
Everyone needs to make sure there are no ongoing assets under management fees being charged on your transferred assets. If there are, that would be counterproductive/pointless.
Thanks for reading and sharing for so long!
Yes, growing net worth through greater income and greater investment returns is much more exciting. But I’ve got to do a better job writing about frugality if I want to grow FS and reach more people.
GL and congrats on building your NW to private wealth management levels!
What is the benefit of private banking for a Financial Samurai reader?
Here’s a comprehensive post that answers your question:
https://www.financialsamurai.com/best-ways-to-maximize-your-financial-advisor/
Curious what the money market rate is now after the fed drop in rates? I dont see anything that good on WF website.
I transferred over 1m out of WF to CIT when the getting was good, but it keeps dropping. Thinking of moving to Vio for 2.4% if CIT drops once more to even 2%.
I’m actually thinking about transferring $1M to TD Ameritrade to get $3,500 in free cash and then buy a money market fund that hopefully pays 2%+ or just buy a 3-month treasury bill.
If I can jump in to provide an answer to this one.
Now I never worked in private banking (I was the insurance-licensed representative and the liaison between the branch and the private banker that covered our territory), nor have I ever had private banking money (God forbid), but I feel I can answer your question pretty well based on how you described yourself.
What benefits would private banking have for you? Absolutely none. Why? Because you are a “financial DIYer”.
Private banking is for the busy businessperson that’s too busy running their business and enjoying their gallivanting around the world to manage the minutiae of investing an personal finance. They make the day-to-day decisions for you based on your investment goals and risk tolerance. They are not order takers like a brokerage, but will make decisions and handle your finances. And not just banking and investing, but lending, insurance, and philanthropy. You can even expect custom financial solutions tailored to your specific needs.
This is for people that have very specific needs and zero time, energy, or inclination to handle their overall net worth growth. If your needs are met with standard financial products and you have no problem managing your own portfolio, you’ve no need for private banking.
That’s my take on it, at least.
Sincerely,
ARB–Angry Retail Banker
Another good article with a real world vignette. Very relevant to my current situation Given me much to think about. Thank you.