2739: How I Wasted Over $13,000 Refinancing My Mortgage by Andy Hill of Marriage Kids and Money

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[00:01:00] This is Optimal Finance Daily episode 2739.

[00:01:04] How I wasted over $13,000 refinancing my mortgage by Andy Hill of marriagekidsandmoney.com.

[00:01:12] And I'm your host and personal finance enthusiast, Diana Merriam.

[00:01:17] Welcome back to Optimal Finance Daily, where every day I read and offer commentary on some of the best personal finance blogs on the web.

[00:01:24] In about 10 minutes or less.

[00:01:26] So with that, let's get right to our next article as we optimize your life.

[00:01:30] How I wasted over $13,000 refinancing my mortgage by Andy Hill of marriagekidsandmoney.com.

[00:01:43] In 2004, my first mortgage was a 30-year 5-in-1 adjustable rate mortgage at 5.25%.

[00:01:51] If that information confuses you, don't worry.

[00:01:54] I was completely confused too when I signed up for it at 22 years old.

[00:01:58] I didn't care though.

[00:02:00] After saving up $20,000, I was thrilled to put that money into my first house down payment.

[00:02:05] I was proud to be a homeowner.

[00:02:08] That's what we're supposed to do, right?

[00:02:10] Buy a home so we're not wasting our money on rent?

[00:02:13] Well, homeownership can be a smart move for some, but not the way I did it.

[00:02:17] I made two mistakes right away with my first home.

[00:02:20] Signing up for a mortgage that I didn't understand

[00:02:23] and committing to homeownership costs that I could not afford.

[00:02:27] Almost immediately, I realized that my income could not support the costs of my home.

[00:02:32] The mortgage costs were 60% of my income.

[00:02:35] Not much money was left over for the important things like, you know, food.

[00:02:41] Mistake number one, not understanding the adjustable rate mortgage or ARM.

[00:02:47] I eventually increased my income by getting roommates at my house and salary increases at my job.

[00:02:54] These moves helped me to breathe more easily each month.

[00:02:58] That still didn't solve my issue with not understanding my mortgage.

[00:03:02] For me, the adjustable rate mortgage had a doomsday ring to it.

[00:03:07] According to LendingTree, said in a scary voice,

[00:03:11] a five-year adjustable rate mortgage is a loan with a fixed rate for the first five years.

[00:03:17] After that, it has an adjustable rate that changes once each year for the remaining life of the loan.

[00:03:23] The risk is that the interest rate most likely will go up,

[00:03:26] which in turn will make your monthly payments rise.

[00:03:30] After my loan hit the five-year mark at the end of 2009,

[00:03:33] I was so nervous that the adjustable rate was going to skyrocket on me.

[00:03:38] To my surprise, my rate actually went down by 1% in the first year.

[00:03:43] By late 2010, my mortgage rate was down from 5.25% to 2.71%.

[00:03:51] Even though it kept decreasing, I didn't believe it would last.

[00:03:55] I thought it was too good to be true.

[00:03:57] That was my major mistake.

[00:04:00] Little did I know that the LIBOR rate, the adjustable part,

[00:04:04] was at near historic lows when I decided enough was enough.

[00:04:08] Not only was the rate at a historic low, it stayed below 2% until 2017.

[00:04:15] So really, if you got a five-in-one adjustable rate mortgage in 2004 and kept at it,

[00:04:20] your mortgage payment would have been super low for over a decade.

[00:04:24] Not me. I decided to refinance.

[00:04:28] Unfortunately, I did not have this information back in 2011.

[00:04:32] I didn't feel comfortable having an adjustable rate mortgage.

[00:04:35] It made me feel uneasy that each year I'd have a new rate

[00:04:39] and I had no idea how it was adjusting.

[00:04:42] Little did I know that mistake was going to cost me big time.

[00:04:46] Mistake number two, refinancing my mortgage for the wrong reason.

[00:04:51] After my confusion and nervousness took over about the adjustable rate,

[00:04:56] I decided that having a fixed rate mortgage would help put my mind at ease.

[00:05:00] I refinanced into a 20-year fixed rate mortgage at 5%.

[00:05:05] Yes, you heard that right.

[00:05:07] I refinanced my mortgage from 2.71% to 5%.

[00:05:12] That's the opposite of what you're supposed to do.

[00:05:15] My loose calculations show that I lost around $11,000 in interest to the bank

[00:05:20] over the next couple of years with that not-so-smart money move.

[00:05:24] I also had to throw down another $2,500 for the refinancing and appraisal process.

[00:05:30] All in all, my lack of understanding of the mortgage product that I signed up for

[00:05:35] lost my family around $13,500.

[00:05:39] Mistake number three, selling our house.

[00:05:43] In late 2013, my wife Nicole and I decided to sell our house and buy a new home.

[00:05:48] The refinancing and appraisal costs were already spent,

[00:05:51] but this move solidified those costs as a waste of money.

[00:05:55] Even if I didn't make the interest rate blunder,

[00:05:58] buying a home shortly after you refinance is not a smart financial move.

[00:06:02] You need to live in the house long enough to have your interest rate savings

[00:06:06] make up for the refinancing costs.

[00:06:09] In my case, I went the complete opposite way

[00:06:11] because I wasn't actually saving anything with my interest rate change.

[00:06:15] I lost money.

[00:06:17] Luckily, with our new house, we were able to lock in a 3% interest rate

[00:06:21] fixed for 15 years with LendingTree.

[00:06:24] That 3% interest rate would have been very similar to the interest rate

[00:06:28] I would have had if I hadn't done my original refinance.

[00:06:32] Damn you, hindsight!

[00:06:34] We ended up paying the new mortgage off completely in four years.

[00:06:38] Perhaps I was just so frustrated with having a mortgage

[00:06:41] that I never wanted one again.

[00:06:44] What I learned about myself and my money from this blunder.

[00:06:48] 1. Don't buy something you don't understand.

[00:06:52] If you don't understand it, don't buy it, especially a mortgage product.

[00:06:56] This goes for life insurance, investments,

[00:06:59] and even the TV with the remote you don't know how to work.

[00:07:03] 2. Seek help from a source that isn't going to profit from your mistakes.

[00:07:08] If you've already signed up for something that confuses you,

[00:07:11] do your own research and gain the knowledge to make an informed decision.

[00:07:15] When I was looking for the best advice to help me with my mortgage refinance decisions,

[00:07:19] I turned to the mortgage company.

[00:07:21] No! Why would they not advise me to sign up for a higher interest rate

[00:07:25] and throw down $2,500 in refinance fees?

[00:07:29] That's their business model, and there's nothing wrong with that.

[00:07:32] Getting independent opinions from multiple sources

[00:07:35] would have been a smart move,

[00:07:37] especially when it comes to big financial decisions.

[00:07:40] 3. Make sure you're going to stay at the house after you refinance.

[00:07:45] Around the time we did our refinance,

[00:07:48] Nicole and I were talking about getting a new house within the next three to five years.

[00:07:52] Even if I hadn't made the interest rate mistake,

[00:07:55] it still wouldn't have made sense for us to refinance.

[00:07:58] We would have had to save at least $2,500 in interest payments

[00:08:02] to make up for the refinance and appraisal costs.

[00:08:05] 4. Listen to your wife. She's smart.

[00:08:09] Nicole never really felt comfortable with refinancing the mortgage.

[00:08:13] When she saw the $2,500 in refinancing costs,

[00:08:16] she got an uneasy feeling about it.

[00:08:19] Nevertheless, I persisted.

[00:08:21] My rationale was that the variable rate could increase rapidly

[00:08:24] and we'd be stuck.

[00:08:26] Obviously, that never happened.

[00:08:28] 5. 15-year fixed-rate mortgage or no mortgage at all.

[00:08:34] The only mortgage I'll ever get going forward is a 15-year fixed-rate mortgage.

[00:08:39] It's extremely straightforward and allows you to get the lowest rate possible.

[00:08:43] Also, the 15-year will ensure you're paying the most principal

[00:08:47] and helps you clobber your mortgage much faster.

[00:08:50] I ended up learning a lot from this huge financial mistake.

[00:08:54] Believe me, it hasn't been my only money blunder.

[00:08:57] I'm sure there will be more.

[00:08:59] This expensive trial and error has forced me

[00:09:01] to increase my financial savvy over the years.

[00:09:04] This is a major reason I started this blog and podcast.

[00:09:08] Our family has had some major financial victories,

[00:09:11] but we also have a lot to learn if we want to take our young family to the next level.

[00:09:16] Don't get me wrong, I'm enjoying the education.

[00:09:19] I just hope it doesn't cost so much for me to learn next time.

[00:09:22] You just listened to the post titled

[00:09:28] How I Wasted Over $13,000 Refinancing My Mortgage

[00:09:33] by Andy Hill of MarriageKidsAndMoney.com

[00:09:36] and I'll be right back with my commentary.

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[00:09:59] whatever they are.

[00:10:01] I definitely wouldn't be able to allocate my finances or plan as clearly without help from Monarch.

[00:10:06] In fact, Monarch is the top rated all-in-one personal finance app.

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[00:10:49] Andy's story reminds me that we all make financial mistakes and it's actually not the end of the world.

[00:10:55] But we should learn from our mistakes so we can make more optimal choices in the future.

[00:11:00] While I didn't sign up for an adjustable rate mortgage when I bought my house in 2018,

[00:11:05] I did miss out on potential savings when the rates were really low in 2020.

[00:11:10] I was a bit impatient when it came to educating myself on refinancing.

[00:11:15] I really only got one quote and quickly determined that the cost of refinancing wasn't worth it.

[00:11:21] Looking back, I wish I would have put a bit more effort into evaluating more options.

[00:11:26] Because once I left my corporate job in 2021, I became less appealing to lenders.

[00:11:32] When you're self-employed, lenders typically want to see two years of self-employment income before they'll consider you for a refinance.

[00:11:39] I had mistakenly thought that my other assets and investment portfolio would have helped,

[00:11:44] but lenders seem to care mostly about income.

[00:11:47] So that meant that I missed the window to potentially lower my interest rate with a refinance.

[00:11:52] I appreciate how open Andy was in this article and sharing his missteps.

[00:11:57] He's a great example of someone who has learned from their mistakes and has come out better for it.

[00:12:02] And that's another edition of Optimal Finance Daily.

[00:12:05] Thank you for listening, and I'll be back with you tomorrow for another post.

[00:12:09] So I'll see you there where your optimal life awaits.