My latest mortgage refinance based on relationship pricing was one of the most frustrating refinance experiences ever.
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. The 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.
The new bank that is 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.
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.
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.
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.
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.
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. Take advantage of lower interest rates and build as much liquidity as possible.
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