Well, slap me twice and call me ‘Mikey’, because I went and out-thought myself again – (just like when I lost 66% of our net worth). I got a little too cute, played a little fast and loose, and lost sight of the bigger picture. Or did I…? In December, 2018, I thought it was the perfect time for a mortgage refinance. Was I right, was I wrong, and is my wife still talking to me?
All this and more – below!
(Photo courtesy of Al Emmert)
First, the mortgage refinance “before” details so we can set up the “after picture” you’re all waiting for
In 2015, we purchased our home on a 7 year ARM (Adjustable Rate Mortgage) at a 4.15% interest rate. (Translation: We were locked into the 4.15% interest rate for 7 years, then our rate would have the ability to fluctuate within a set range each year for the remaining 23 years of the mortgage).
I absolutely loved the whole 4.15% interest rate thing, but the 23 years of potential fluctuation terrified the bejeezus out of me (this originally corrected to Bee Gees, so…)
Here are a few reasons why we chose the 7-year ARM and also why I was terrified
1- We were cash strapped because of our approaching mountain of debtand because we hoped to buy a businesssoon. And the nature of the ARM (with the risk on the backend) led to lower interest rates (and payments) on the front end as compared with some of the more traditional loans we were considering.
2- I was terrified because, in 2015, interest rates were at the lowest point that they had been in the last… EVER …years. Literally ever… It’s crazy but when my parents bought their first home a long time ago (1980s), they scored a sick upper teens/lower 20s interest rate (I’ll let them fact-check me there). So our 4.15% seemed pretty amazing in comparison. However – there was literally nowhere for our (Adjustable Rate) mortgage rate to go but up.
3- We were locked into our rate for 4 more years and the rates could only increase at small increments annually but haven’t we seen that baby steps can lead to big-time financial results…? Yes – we have.
So, every time the Fed hinted at raising rates, I’d start dreaming of the ‘ole refinance options.
A few important things to point out about our past situation
We absolutely love our home and – most especially – its location. We’re in close proximity to outdoor activities, a local downtown, and schools in our area. Another thing is that we have plenty of space to accommodate our family of 4, with a little room for addition (if needed… Definitely not going to be needed…. But maybe we will need it…) down the road.
Long story short – we’re not planning on moving to a different home anytime soon. This was critically important because refinancing your home mortgage costs money. Sure, the cost can be distributed down to a minuscule amount throughout your 15-30 years of payments, but $4-8k is still $4-8k.
We were happy paying that price for security. And our security was a locked-in interest rate that remained low and could not possibly change. Our bet was that we would save more through lower interest rates for the next 26 years than we would pay in closing costs (if we were to refinance rather than rolling the financial dice and sticking with the ARM).
Refinancing was my “grass is greener” financial trope of 2018
I had the stick – in the form of the economy (and its rising interest rates), and I was chasing the carrot of potential benefits to refinancing.
Some historical context:
The Fed had raised interest rates for 5 consecutive quarters beginning at the end of 2017 and for the 5th consecutive quarter on December 19, 2018. And although there was some debate amongst Fed staff and the press as to how many rate increases would come in 2019, there was a consensus that some increase(s) would take place.
So, after months of mentioning the possibility of refinancing to my wife and the constantly evolving economic conditions, I reached a breaking point and she gave her blessing.
We decided to refinance to a fixed rate 30-year mortgage
By this point, you know why we wanted the fixed rate, but you may be wondering why we chose 30 years… Well, as new business owners who just built a brand new office, we’re also juggling student loans, and a recent car purchase. And as I’ve described in a previous post, when considering our mountain of debt, our home mortgage is last on the priority list (for debt payoff).
Once our other, high-priority loans are paid off, we’ll have the ability to pay down our 30-year mortgage at a much faster rate… if that’s what we decide to do.
The mechanics of actually refinancing our loan
I’m a fortunate son…
I’ve mentioned in previous posts that my mother was an entrepreneur multiple times over. The consistency across her ventures was the mortgage industry.
She spent multiple decades in and around banking and loans, so when I need to make something happen – I know exactly who to call.
And whenever I’ve dealt with home loans or anything tangentially related to home loans, I call up Joe. Joe King is a family friend, a former associate with mom, and someone who has decades in the banking industry by his own right.
Joe is currently working for Farmers National Bank and while we have no financial relationship with regards to this post, if you’re considering a home loan or a mortgage refinance, and you’re asking for my opinion – I’d be giving you his number.
Yes – I’ve heard about the benefits of Rocket Mortgage and others in the industry
Call me old fashioned, but when it comes to 6-figure loans, I’d prefer a little more than 2 clicks and a swipe. I’m a guy with questions, concerns, (too many) ideas, and when it comes to the roof over our heads, I prefer talking with a human (Joe).
We’re 3 hours apart, geographically, but through a few phone calls, texts, emails, and some e-signatures, Joe had answered all my questions and had our loan through underwriting in under a month. Our mortgage refinance was uber-convenient and still had the personal touch my old-souled self prefers.
Our refinance went off without a hitch, but the economy – not so much
For months, Mr. Jerome Powell (Chairman of the Federal Reserve) had (not even hinted at, but) hammered the drum of – “The Fed will be consistently raising interest rates for the foreseeable future.” (That’s paraphrased).
So, imagine my surprise when I’m fresh off our refinance, sitting pretty in my security wrapped fixed-rate mortgage, and listening to my favorite podcast (Marketplace) while sipping my morning coffee (am I an 80-year-old man already?? – debatable), when Kai Rysdall hops on the mics to tell me that Chairman Powell, “is going back on (his) plans to keep raising interest rates, deciding to instead be “patient” with markets.”
My inner dialogue in that moment:
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“WTF?!?! So, we just paid multiple k’s in closing costs to lock in a “higher” interest rate than may be available??? Bro…”
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“Jerome – you told me we’d be raising those interest rates at a constant pace for a while… Bro…”
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“Is this the absolute worst financial decision I’ve ever made… Bro…” (In retrospect, leasing a car I couldn’t afford and losing 66% of our net worth (at roughly the same time) were both much worse decisions)
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“Is the economy really jacked up right now/is this next recession coming earlier than 2020 (as many analysts predict)… Bro… I was hoping for another year or two to build up our savings…”
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….Facepalm…
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…Mike immediately goes to gym and rather than completing the prescribed group workout just hits the heavy bag for 30 minutes… (OK – it was 20 minutes – get off my back, man).
Exercise always helps, is my therapy at times, and allows me a moment to digest, reflect, and process – so that we can move forward.
After that processing, here’s the fallout as I see it:
Was this all a huge mistake and is my wife still talking to me?
I’ll answer the former first (I just got “former and latter” straight about a year ago, so I’m going to use these liberally for the next few months until I wear them out – bear with me).
Poor financial/economic luck aside – no – I don’t see this as a terrible mistake.
Could my timing have been better – yes – but seeing the complete picture and given our current goals, our financial position is more secure today than it was in early December. Now, if we up and move in a year, then me refinancing our mortgage was a complete disaster.
Also, just like I don’t try to time the stock market (because I can’t do so effectively), I don’t pretend to know what the economy is going to do in the future; either short or long-term. There will be ups and downs along the way, but as long as I focus on controlling what I can using the information I know now coupled with what I have influence over in the future – that’s all I can really do.
Were there risks to refinancing our mortgage in December of 2018?
100% yes there were…
But there were also risks to not taking action.
And based on all the inputs I had – and – my best guess of what the future would hold (at that time), it made more financial sense to refinance.
Our decision extrapolated to your life
It is so difficult to craft a series of “if this / then that” type of posts concerning financial advice or anything else, because of all the tiny little variables that are unique to a scenario. The intangibles. And, at times, the immeasurables.
Personal finance is personal.
So take stock of all your variables, look into the future as best you can, and keep your morals and values in mind, but eventually, you’re going to have to make the right decision with a fraction of the information available.
Your job now is to increase the percentage of what you know compared with what you don’t. Then make the call and move forward. Best of luck.
Is my wife still talking to me???
You can’t bat 1,000 – but I try to pull my weight in other areas as well… Also, I’ve married the most understanding woman in the world, who also happens to be a saint. We’re good ????
Considering a mortgage refinance anytime soon or done one recently? Let us know in the comments below!
Thanks for reading!
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I’m glad you’re here. Thanks again and talk soon!
– Mike
