In 2004, my first mortgage was a 30-year 5/1 ARM at 5.25%. If that information confuses you, don’t worry. I was completely confused too when I signed up for it at 22 years old.
I didn’t care though. After saving up $20,000, I was thrilled to put that money into my first house down payment. I was proud to be a homeowner.
That’s what we’re supposed to do, right? Buy a home so we’re not wasting our money on rent?
Well, homeownership can be a smart move for some, but not the way I did it. I made two mistakes right away with my first home:
- Signing up for a mortgage that I didn’t understand
- Committing to homeownership costs that I could not afford
Almost immediately, I realized that my income could not support the costs of my home. The mortgage costs were 60% of my income. Not much money was left over for the important things like you know … food!
Mistake #1: Not Understanding the Adjustable Rate Mortgage (ARM)
I eventually increased my income by getting roommates at my house and salary increases at my job. These moves helped me to breathe more easily each month.
That still didn’t solve my issue with not understanding my mortgage. For me, the Adjustable Rate Mortgage (ARM) had a doomsday ring to it.
According to LendingTree, (Say this in a scary voice) “A 5 Year ARM is a loan with a fixed rate for the first five years. After that, it has an adjustable-rate that changes once each year for the remaining life of the loan … The risk is that the interest rate most likely will go up, which in turn will make your monthly payments rise.”
After my loan hit the 5-year mark at the end of 2009, I was so nervous that the adjustable rate was going to skyrocket on me. To my surprise, my rate actually went down by 1% in the first year. (Huh … that's odd.)
By late 2010, my mortgage rate was down from 5.25% to 2.71%.
Even though it kept decreasing … I didn’t believe it would last. I thought it was too good to be true.
That was my major mistake.
Little did I know that the LIBOR rate (the adjustable part) was at near historic lows when I decided enough was enough. Not only was the rate at a historic low, it stayed below 2% until 2017! So really, if you got a 5/1 ARM in 2004 (and kept it), your mortgage payment would have been super low for over a decade.
Not me … I decided to refinance.
Unfortunately, I did not have this information back in 2011. I didn't feel comfortable having an ARM. It made me feel uneasy that each year I’d have a new rate and I had no idea how it was adjusting.
Little did I know that mistake was going to cost me big time.
Mistake #2: Refinancing My Mortgage for the Wrong Reason
After my confusion and nervousness took over about the adjustable rate, I decided that having a fixed rate mortgage would help put my mind at ease. I refinanced into a 20-year fixed rate mortgage at 5%.
Yes, you heard that right. I refinanced my mortgage from 2.71% to 5%. That’s the opposite of what you’re supposed to do.
My loose calculations show that I lost around $11,000 in interest to the bank over the next couple of years with that not-so-smart money move.
I also had to throw down another $2,500 for the refinancing and appraisal process.
All in all, my lack of understanding of the mortgage product that I signed up for lost my family around $13,500!
Mistake #3: Selling Our House
In late 2013, my wife Nicole and I decided to sell our house and buy a new home. The refinancing and appraisal costs were already spent, but this move solidified those costs as a waste of money.
Even if I didn’t make the interest rate blunder, buying a home shortly after you refinance is not a smart financial move. You need to live in the house long enough to have your interest rate savings make up for the refinancing costs. In my case, I went the complete opposite way because I wasn’t actually saving anything with my interest rate change. I lost money!
Luckily, with our new house, we were able to lock in a 3% interest rate fixed for 15 years with LendingTree. That 3% interest rate would have been very similar to the interest rate I would have had if I hadn’t done my original refinance.
Damn you, hindsight!
We ended up paying the new mortgage off completely in 4 years. Perhaps I was just so frustrated with having a mortgage that I never wanted one again!
What I Learned About Myself and My Money From This Blunder
Don’t Buy Something You Don’t Understand
If you don’t understand it, don’t buy it … especially a mortgage product. This goes for life insurance, investments and even the TV with the remote you don’t know how to work.
Seek Help From a Source That Isn’t Going to Profit From Your Mistakes
If you have already signed up for something that confuses you, do your own research and gain the knowledge to make an informed decision.
When I was looking for the best advice to help me with my mortgage refinance decisions, I turned to the mortgage company.
Why would they not advise me to sign up for a higher interest rate and throw down $2,500 in refinance fees? That’s their business model and there’s nothing wrong with that.
Getting independent opinions from multiple sources would have been a smart move especially when it comes to big financial decisions.
Make Sure You’re Going to Stay in the House After You Refinance
Around the time we did our refinance, Nicole and I were talking about getting a new house within the next 3-5 years. Even if I hadn’t made the interest rate mistake, it still wouldn’t have made sense for us to refinance. We would’ve had to save at least $2,500 in interest payments to make up for the refinance and appraisal costs.
Listen to Your Wife … She’s Smart
Nicole never really felt comfortable with refinancing the mortgage. When she saw the $2,500 refinancing costs, she got an uneasy feeling about it. Nevertheless, I persisted. My rationale was that the variable rate could increase rapidly and we’d be stuck. Obviously, that never happened.
15-Year Fixed Rate Mortgage or No Mortgage At All
The only mortgage I’ll ever get going forward is a 15-year fixed rate mortgage. It’s extremely straightforward and allows you to get the lowest rate possible.
Also, the 15-year will ensure you're paying the most principal and helps you clobber your mortgage much faster.
I ended up learning a lot from this HUGE financial mistake. Believe me, it hasn’t been my only money blunder! I'm sure there will be more.
This (expensive) trial and error has forced me to increase my financial savvy over the years. This is a major reason I started this blog and podcast. Our family has had some major financial victories, but we also have a lot to learn if we want to take our young family to the next level.
Don't get me wrong, I'm enjoying the education. I just hope it doesn’t cost so much for me to learn next time!
What financial mistakes have you made?
Please let me know in the comments below.
I’ve always had fixed rate mortgages…those adjustable ones can be scary! I’d say I’ve made mistakes refinancing when the rates continued to go down, but it was more a case of just never knowing when rates have hit bottom. For anyone considering refinancing, I highly recommend checking out one of the many refinancing calculators online to see if it’s worth your while. Under the right circumstances it can be a good move, but as you found out, it can also be a bad one. Oh, and always listen to your wife!
Yes, I broke the sacred “always listen to your wife” rule!
Fixed rate mortgages at least make simple sense. From now on, it’ll be fixed rate or no mortgage at all 🙂
I had a thing for cars in my 20s and spent a lot of money trading from one car to the next. Very stupid. Who knows how much money I needlessly burned on that.
Cars can get ya! I leased an Audi convertible while I was still living at home with my Mom. Classy.