The Upside To A Long Drawn Out Mortgage Refinance

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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. I want to share the upside to a long drawn out mortgage refinance.

What used to take most people 30 days to refinance, now often takes 2+ 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. This is especially true for those who have Adjustable Rate Mortgages.

Why A Long Mortgage Refinance Is Great

If you're frustrated by your long mortgage refinance, here are some positives to think about.

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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30 thoughts on “The Upside To A Long Drawn Out Mortgage Refinance”

  1. Your First Million

    We just refinanced our home. We reduced our interest rate from 4.5% down to 3.5% and there were not out of pocket costs to get the new loan. It reduced our monthly payment by over $100 per month. We are now only paying $1,100 per month (including taxes and insurance) for a house that is worth over $300k. My neighbors are renting their house which is the same model as my house, and they are paying $1,600 per month. Take advantage of this cheap money!

  2. Presently refinancing from an 7/1 ARM at 3.75% we got when my wife worked in commission only sales at the time for (only) 18 months. The local credit union was smart enough to lobby their loan people to accept her income when we had 25% cash for a down payment but could only get the 7/1. We are going to a 15 year fixed 2.625% rate with cash out to pay her student loan debt at 6%, so we will end up cutting 12 years off the payments for about $50 per month additional cash out. Been in process for about 2 months. Located in Eastern Iowa, 90k on the house, 9k in student loans.

  3. I’m locked in to refi my loan on a 15 year fixed at 2.75%. Rates have risen since then, but 5/1 ARMs are usually as expensive or more expensive compared to 15 year fixed loans. Cash flow isn’t a huge issue for us, and we don’t plan to stay in debt forever so there’s no reason to choose a variable rate over a fixed one unless you really think rates will drop from here and stay low over the entire term of the loan (a bet I’m not willing to take).

  4. Another long time reader & first time poster here.
    I’ve also been overly cautious about the housing market, I don’t know, I feel everyone in my town is going crazy and paying way too much for real estate. Obviously, I do not have a crystal ball, but I can’t get the famous “be fearful when others are greedy and be greedy when others are fearful” quote out of my mind.
    Let’s see how things go when the next recession hits.

  5. Hi. First time commenter long time reader. Thinking of refi on 167k balance on condo that is not primary residence. Currently have 4.5% since a 2010 refi. Thinking of going down to a 15 year if I can get a good rate. Does anyone have a good recommendation for bank to use? The condo in suburb of NYC is worth 100 k less than purchase in 2007 :(. Trying to get close to break even on rent I am receiving plus 7500 tax bill. Insights? Thx!!

  6. I’m refi’ing to a 7/1 arm at 3.25% living in Baltimore MD. And the mortgage officer is not charging me anything because he’s a family friend. Any thoughts?

  7. Sam,
    This might be the first article I have read lauding the long wait to refi…i like your positive attitude towards…excellent advice so that people don’t worry…

  8. Expat Warrior

    Good post.

    I’ve been thinking about refinancing my rental property, but I’m not sure if it’s worth hanging out to it long term and dealing with the hassles that come with a rental property while I live overseas.

    I think that I could probably get a better rate via a refinance than the fixed 3.75% rate that I currently have. The alternative would be to sell it and invest in dividend growing stocks. There are plenty of pros and cons to consider so time will tell.

  9. Financial Slacker

    You have more patience than me. On my last refinance, which was about two years ago, I was so frustrated with the mortgage lender. I’m glad to hear that it wasn’t just me.

    After reading a number of your posts, you have me now thinking I need to look at a 5/1 ARM.

    If I go through with it, I’ll keep your suggestions above in mind.


  10. Heck of an attitude to have, but certainly one I’ve employed myself in negotiations. If someone takes a week to respond to me consistently, don’t be surprised when I too take a week. If they get mad, I just feel like it’s their job to sit there and do whatever it is they need to do; how can they expect me to respond quicker than them when I have everything else going on in my life?

    I always remind people that as long as it’s the bank extending your rate lock, don’t worry about how long it takes. You pay a monthly bill, on a 30 year mortgage. If it takes an extra two weeks or two months, that’s just more time at your lower rate – you were already satisfied with your current rate, that’s why you got it!

  11. PatientWealthBuilder

    I keep getting letters from lenders trying to get me to refinance. However, I just refinanced the property to a 15 year fixed at a very low rate. I really only want to do a cash-out refinance on my investment property to have money to 1) re-invest in a different property and 2) to invest in the stock market. The problem is that there isn’t too much that they will let me take out because they’ll only allow a 70% Loan-to-value on an investment property. It seems very silly to me as they would be able to do a bigger loan with a very credit worthy borrower. but that is banks for you! They’ll make a poor loan as long as it fits their cookie-cutter standards but they won’t make a creative loan which is great for them.

  12. Great Article, Now it enlightens me how “Delay ” in re-fi is good as I was cursing myself, bank,loan officer last 2 times for once 5 month process & later almost 3 -month process. But in case if the rates go up after these Rate lock deadlines, then it might be a bit risky unless you are on mercy with the Loan UW or bank.

  13. Taking out a Mortgage is always a tedious process. I am almost done applying for one now because of my last experience. Applied for a mortgage for our next home, which I thought was very straightforward. Was doing 40% equity, had cash in the bank, and had good ratings and all. But, one of the largest banks messed up the whole process, took forever to process things, and kept asking for more documents. It looked like underwriters were just not good enough to understand the client and the loan risks. I ended up paying for house in cash (!!) in the end, and told the bank to fire the underwriters for costing the bank 4% or so guaranteed income.

  14. A great reminder that everything is negotiable.

    Being fairly literal minded, when someone gives me a bright line, like a date, my first reaction is to treat that date as fixed.

    It’s taken a lifetime of negotiations experience and constant mental reminders, to achieve the flexible mindset that everything, including rate lock dates, is negotiable.

  15. I love when bureaucratic slowness can benefit me. Knowing that I want a mortgage next year, I’ve focused for just two months and already improved my credit score by over 30 points. Now I’m excellent. I have time to position myself even better.

    1. The MAD Consultant

      Part of the bureaucratic slowness isn’t the banks fault. There were plenty of new mortgage and refinancing regulations that went into effect this past year. I think most people should start to expect their process to move up in time. 30-45 days to close will probably be a thing of the past for the majority.

      1. The MAD Consultant

        One more item. Sam I know we disagree somewhat on the path of interest rates. But why do you think the US will follow Japan and the ECB with negative interest rates?

  16. Believe Fire

    Great way to have a positive attitude when the banks drag their feet. I’m not surprised you gave them a taste of their own medicine! I’ve come to expect that from you Sam, and it is one of the many reasons we enjoy your blog.

    Hope Paris is great. We’re loving the Abruzzo region of Italy.

  17. My bank just called, but I told them we don’t want to refinance. We’re planning to sell our condo in a few years and move into our rental so it doesn’t make sense to refinance. Mrs. RB40 really hates the whole process too… I heard the long term rate should stay the same this year, isn’t it? So a long process is probably fine.

  18. Mr. Tako @ Mr. Tako Escapes

    We’ve already refinanced down to a very low rate…probably as low as we can possibly get with our current form of mortgage.

    When we did refinance, I wasn’t in any hurry. We just let the bank take their time. I was more interested in having the lowest rate, rather than speed. What’s a few more weeks when we’ll be paying on the mortgage for many years?

    In total, I think it only took slightly over a month for our refi.

  19. I haven’t experienced a refi recently, but when we closed on our first home several years ago, we went through a similar experience that felt like it would never end. I grew to dread receiving e-mails asking for “one more thing.” In the end, the delay ended up benefitting everyone – we had another month to save and pay cash for new furniture for the house and the seller’s kid got to finish school before moving – but it stressed me out at the time.

  20. We’re actually closing on our refi tomorrow! We’re taking the mortgage on our primary residence down from a 30-year fixed rate at 3 7/8% down to a 15-year fixed rate at 2 7/8%. Didn’t want to go the ARM route because I couldn’t find a big enough rate differential to make it worth the extra risk for me.

    I’m a little embarrassed to admit how excited I am for the refi – a clear sign that I am over forty!

  21. Apathy Ends

    The two times I have bought a house they told me it would cost money to extend the lock, looks like a negotiation fail on my part! Always learning with Mr. Samurai

    1. It’s different with a purchase; in those cases you usually do have to pay if you want, say, a 60 or 90 day rate lock as opposed to the standard 45 day one (it used to be 30 days but most banks go straight to 45 days now). The exception is if you have to delay closing due to the bank not being ready to close; then they will extend your rate lock for free. Refinances can drag out though – again usually due to the bank delaying because they prioritize purchase loans above refis – and so in those cases they don’t want to lose the deal so they usually extend the rate lock for free right before it expires.

  22. John C @ Action Economics

    The two times I refinanced I always pushed to get it done ASAP, because of the fluctuations in my income. Since the majority of my work is seasonal I am off work in the summer months, if I had a refi drag out into the summer instead of my numbers looking better, they would look far worse. It’s good to know if a loan does drag on the bank will extend the rate past the lock period, I figured if rates went up during the 30 days they would increase the rate.

    I’m currently on the fence about doing a refi, we are aggressively paying off our mortgage and it should be done in under 4 years. The balance is under $100K and we have a rate just over 4%. With refi costs I don’t think it would be worth the hassle.

  23. The Green Swan

    Can’t say we’re refinancing right now, but still enjoyed reading your post (as always). I like how you bring topics to life with real life examples. Makes them more entertaining and easier to follow or understand. Enjoy Paris!

    The Green Swan

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