In the past, I used to be perturbed by how long it took to refinance a mortgage. The whole process almost got derailed on its 97th day due to a bad credit report unbeknownst to me. Luckily, the refinance eventually went through.
What used to take most people 30 days to refinance, now often takes 3+ months to finish. I’m much more zen today. So long as it eventually closes, I don’t mind if my refinance takes forever. Well, not really forever. But as long as the bank wants, so long as I’m not paying extra fees.
Let me share with you the main reasons why having a long mortgage refinance process is actually a wonderful thing, especially for those who have Adjustable Rate Mortgages or are looking to refinance into an Adjustable Rate Mortgage.
Why A Long Mortgage Refinance Is Great
1) Less stress. One key way to reduce stress from the beginning is to make a deal up front that all mortgage refinance fees occurred before close (application fee, appraisal fee, etc) shall be refunded if your mortgage refinance does not go through.
Although you will feel better knowing you won’t lose money refinancing, you’ll still feel stress due to the documentation gathering process for the underwriter. Just when you think you’re done, the underwriter asks for one more. Sometimes the documents they want are outside of your control.
For example, the underwriter may ask for proof of insurance for the entire building where your rental condo resides. If the HOA secretary happens to be busy or on vacation, you’re stuck waiting for the document to send to the bank. And what if the HOA secretary can’t get a hold of the insurance agent either?
If the bank is asking you for information ASAP, as they always do, then you’re going to be stressed trying to track the person and the document down because you’re worried if you don’t comply, you won’t get approved. A longer mortgage refinance time reduces your document gathering stress.
2) More time to improve your creditworthiness. Some refinances fail because at some point in the process, the underwriter determines you aren’t creditworthy even though the mortgage officer said you are to lure you in. Do not confuse the mortgage officer with the underwriter. Consider the mortgage officer as the sales person, and the underwriter as the one who actually does the work to approve your loan.
The underwriter is basically peeling an onion to get to what’s inside. The more time you have, the more things you can do to improve your creditworthiness by earning more money, injecting more capital onto your balance sheet, fixing credit errors, and reducing debt. If you only have 1-2 months to refinance, there’s only so much you can do. But if the refinance process takes four months, then there’s a lot you can do to make yourself look better on paper.
Because my mortgage refinance is now in its 4th month, I was able to give myself a 150% raise for the past two months to lower my debt-to-income ratio. I had previously been paying myself less due to my desire to pay less self-employment tax and more distributions. Please note the bank also checks the last two years of your income as well. But they check the last two months of your income to make sure the trend is flat or up.
3) Maximize your existing mortgage term. I’m a proponent of getting an Adjustable Rate Mortgage (ARM) because I believe interest rates will stay low for a very long time. Just look at the negative interest rates going on in Japan and Sweden. Australia is even threatening to implement a negative interest rate policy. If I take out a 5/1 ARM, the ideal scenario is to refinance into an equal or lower rate the day the five year fixed term adjusts to get the full benefit of the lower fixed rate. However, the bond market doesn’t wait for you. It does what the market wants.
ARM holders must make a calculated decision when to refinance their ARMs. In my case, I saw an opportunity to refinance from 2.625% down to 2.375% after four years into a 5/1 ARM. As a result, I wouldn’t mind my refinance process taking a full year. Yes, I’ll pay my existing rate for longer, but I’ll also start the clock on my new lower rate later as well. Every time you refinance, there’s economic waste due to refinance cost. By timing your mortgage refinance so that it lasts until the fixed rate adjusts, you maximize your refinance benefit.
Don’t Believe What The Banks Say
Whenever you lock in a rate, the bank will say the rate is locked until a certain date. This creates a sense of urgency to get the refinance done before then or else risk losing the rate forever. But as I’ve discovered time and time again, due to more stringent underwriting terms, the date when the rate is supposed to expire always gets extended.
When I first started my refinance on Feb 12, the bank said they’d lock the rate until April 13. Game on! Well guess what? My mortgage refinance is set to close on May 31! From Feb 12 – April 13, I was frustrated how slow they were in requesting information from me. A week would go by before I heard anything from my mortgage officer after I sent in a pile of documents.
The reality is the bank can extend your rate lock for as long as they want, so long as its economically profitable for them to do so. Each extension eats into the mortgage officer’s profits, not yours. Instead of getting frustrated by my mortgage officer’s lack of responsiveness, I started matching her response rate to elongate the process. If she took one week to respond to my e-mail, I’d take up to one week to respond. It was perfect.You just need to make sure you are responsive with all requests so they don’t put the extension on you.
If you’ve got time left on your ARM until the rate adjusts, enjoy the long mortgage refinance process. The same goes for people refinancing from a 30-year fixed to an ARM. Definitely do what you can to bolster your finances and help your mortgage officer out when she has requests from the underwriter. But drag your feet a little to match their feet dragging.
Once you match the pace of the bank, you’ll feel much less stressed. Your goal is to pay the lowest rate possible for the longest period of time. Let your bank’s inefficiency help you!
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Updated for 2019 and beyond.