Beware Of A Mortgage Refinance Miscalculation That Could Be Costly

Let me tell you one of my favorite jokes.

Elizabeth, Donald, and Joe are stranded on a desert island. Their plane crash-landed and they miraculously survived.

After living off of only coconuts for two weeks, Donald looks into the distance and thinks he sees land. He’s not sure whether he’s delirious, but he convinces Elizabeth and Joe that there’s only one way to find out.

After swimming for more than eight hours, the gang of three happily realize Donald really did see land! They’re elated.

About 30 minutes away from shore Joe suddenly stops and says, “Folks, I’m too tired to continue. Go ahead without me.” Joe then decides to turn around and swim all the way back to the island.

During my mortgage refinance, I pulled a Joe. Let me explain.

Cancelling My Mortgage Refinance

After two months into my mortgage refinance process with Citibank, I decided to cancel. We were only seven days away from closing.

I was refinancing a 5/1 ARM at 2.5% into a 10/1 ARM at 3% for a cost of $1,500. If I did not refinance before August 1, my rate would reset to 4.5%. I canceled in late May.

The main reason why I canceled with Citibank was due to broken promises. Citibank promised me 2.875% if I just locked with them the week I did at 3%. They said they would get my rate down by 0.125% the following week, but they never did.

Not one to reward broken promises, I decided to hunt elsewhere. I still had two months of time before my ARM reset.

I found a better deal with Wells Fargo who offered me 2.875% for a 7/1 ARM with no refinance fees plus a $2,000 credit. Getting a 0.125% lower rate and $3,500 in savings was tempting, even if I had to go through the pain of transferring $750,000 in assets to the bank. I didn’t mind transferring one of my portfolios because it was mostly full of 20-year municipal bonds that I’d hold on forever.

So I went back to Citibank and asked them to match Wells Fargo’s offer of 2.875% because Citibank said they would be willing to match a better offer once I locked. Besides, Citibank had originally promised me 2.875% anyway.

I was even willing to accept 2.875% and pay $1,500 in refinance fees with Citibank instead of receiving 2.875% and a $2,000 credit from Wells Fargo to keep things simple.

Surely, Citibank would comply. After all, I’ve been a good customer with multiple accounts since 2001.

But Citibank refused to honor their promise. If I didn’t cancel with Citibank I would feel like a loser for being taken advantage of. So I told them to cancel all the work we did up to that point and refund me the upfront appraisal and credit check fees, which they did.

I wasn’t completely starting over with Wells Fargo because I already had all the documents they needed due to my refinance process with Citibank. But I was taking a gamble because Wells Fargo was a new relationship.

The Wells Fargo mortgage representative said that two months should be enough time to get the refinance squared away so that I’d be paying the lower 2.875% rate come August 1st instead of my new 4.5% rate.

I believed him. Oops.

A Crucial Mortgage Refinance Miscalculation

It turns out, my Wells Fargo loan officer was wrong. I’m now in my third month of refinancing. The refinance has taken so long that I had to resend several brokerage documents for underwriting because they had expired. When will it ever end? I don’t know.

My loan officer said that because mortgage rates have continued to go down since we locked, there’s a huge backlog of applications their underwriters have to go through.

Based on public data, mortgage refinancing volume is up some 50% YoY in July. When August data comes out, I’m sure the increase will be of similar magnitude. It is a mortgage refinancing bonanza!

The only silver lining is that I was able to pressure them to re-lock to a lower rate given the process is taking so long. I’m now at 2.75% with $4,000 in credit from 2.875% and a $2,000 credit, if I move over $750,000 in assets.

I’ve calculated that each day past August 1 my mortgage refinance does not close is costing me an unanticipated $33.56 in interest because I’m paying the new 4.5% rate instead of the new 2.75% rate. Over a 30 day period, that’s an extra $1,005 in mortgage interest.

This is disappointing because I pride myself on taking into consideration every single variable possible to make the right choice. The one variable I did not anticipate was the loan officer overpromising and underdelivering by so much.

One of the most common sales tactics is to lure you in with a deal that sounds too good to be true For example, car dealerships used to advertise a smoking good deal for a car in the paper with the fine print “only one available at this price.” By the time you got to the store, the car was of course gone. All that’s left are the full-price vehicles.

I took a risk with a new lender who is not delivering. At least I don’t have to pay for the rate extension.

Refinancing Your Mortgage Will Take Longer Than You Think

Long gone are the days when you could refinance in 30 – 45 days. When I took out a new mortgage in 2014 for my current residence, it took about two months to close. If you are to refinance today, I would mentally bake in it taking 3 – 4 months to successfully complete a refinance.

A 3 – 4 month closing period is particularly pertinent for Adjustable Rate Mortgage (ARM) holders who are facing an expiration of their fixed term. Your ultimate goal is to refinance an ARM the week its set to reset.

For those of you with 30-year fixed mortgages, it doesn’t matter as much how long the refinance takes because your mortgage rate isn’t resetting. But you should still refinance and push to have a quicker close to save money. Paying a 30-year fixed-rate mortgage since the late 1980s has already been proven to be a suboptimal choice as interest rates have come down since.

Make sure you calculate the estimated extra interest cost you will pay if you do not refinance by your target date. Make sure the bank also covers all mortgage extension fees if they cannot deliver.

If you are choosing between banks, going with the bank that can refinance your mortgage quicker, even if they are charging a slightly higher rate, might actually be better. You must not only calculate the true cost differential between two banks, but also the extra hassle you must go through to deal with a bank with a long close.

Once my refinance is completed I hereby solemnly swear never to refinance a mortgage again. I will pay off my principal residence mortgage before it resets in September 2026. If I don’t because I found some sweet property in Hawaii before then, it shouldn’t matter because the mortgage will be so small by then that even a large jump in interest rates won’t make a difference to my cash flow.

If you smartly plan on refinancing your mortgage today, I wish you better luck than I’ve received so far. Fingers crossed my mortgage refinance will be done by the end of this month. When it is, I’ll share the final details and some new lessons learned.

Related:

Refinance Now As The Yield Curve Inverts

30-Year Fixed Or Adjustable Rate Mortgage? The Choice Is Clear

The Anatomy Of A Adjustable Rate Mortgage Increase

Average Credit Score To Qualify For A Mortgage Is Now Very High

Readers, if you have refinanced a mortgage recently, how long did it take you? I’m curious to know whether the process to refinance is taking longer and longer due to the sheer volume increase.

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