I was also in the middle of divorce negotiations when COVID-19 was just taking hold in China. We had one asset in dispute: the house I have lived in with my children for the last eight years. In South Carolina, the only choices you have when it comes to handling real property in divorce is to either sell it and split the profits or refinance in one spouse's name only.
I wanted the house, to keep things as stable as possible for the kids. So I negotiated a refinance in my name, releasing my ex from any financial responsibility.
The deal was struck in November and I had 90 days to secure a loan. I not only was able to refinance my mortgage , but I also drastically reduced my monthly expenses to where I'm doing OK right now despite a greatly reduced income.
Finding a bank to refinance my mortgage
I contacted bank after bank about refinancing my mortgage from December through January. They all said the same thing: Your credit score is fine, the amount you want to refinance is fine, but you won't be able to take out any cash from the refinance (which I needed to help pay off bills), and you don't have enough income history for us to approve your loan.
Because I had moved from a salaried job to being a business owner, the banks I contacted would only look at my business income in considering my application. I have freelanced periodically for the past 20 years, but less so when I had a salaried job. The banks would only consider the six months of income I had in 2019 and the $10,000 in freelance income from 2018. This put me well below their income requirements.
Having written about personal finance topics for much of the year, I knew that credit unions could often help when traditional banks were not ready to lend. I contacted Carolina Trust Federal Credit Union, a local institution with which I had a car loan a few years ago.
I explained my situation to one of their loan officers and asked if they could help. My existing loan was a 30-year FHA mortgage for about $153,000 at 3.85% APR with a $1,152 monthly payment that went toward principal, interest, property taxes, and both homeowner's insurance and private mortgage insurance . I was looking for a 30-year loan, but with a fixed APR at a lower rate that would result in a lower monthly payment and no PMI.
The loan officer asked several questions, such as projected business income, overall income for the past few years, if I had been profitable freelancing in the past, and how long I have worked in the industry. Based on my answers, my loan officer told me if I completed an application and provided copies of my 2018 and 2019 tax returns, she would most likely be able to refinance my house.
The refinance process
I began the loan process in mid-February, providing all kinds of information and documentation, such as profit and loss statements for 2019 and so far in 2020, my 2017 taxes in addition to the others requested, W2s from all requested years, and current balances on all the accounts listed on my credit report. I also had to explain a few items on my credit report, pay for an appraiser to come to evaluate my house, and find out if the title insurance I paid for when I first closed on the house would apply to this new process.
I was offered a new 30-year fixed-rate mortgage at 3.68% with a monthly payment around $850. That was acceptable to me, but I was also thinking at that time about my outstanding credit card debt, which was around $35,000 from medical bills, business expenses, living expenses, etc.
I was going to consolidate with a personal loan I had gotten a quote on, but when I told my loan officer I was looking to do this, she told me the credit union could offer me a payout from the new mortgage that would cover all of these debts.
Since the credit union had different standards, they could use more of the equity in my house than other banks would and offer me a new mortgage at $199,000 instead of $153,000. With the extra money, I could pay for all the closing costs and all of my outstanding debt. This would lower my monthly bills from around $3,500 to $1,500 and build a stash of emergency cash.
Saying yes to an adjustable-rate mortgage
There was one catch, though. I would have to take an adjustable-rate loan with an APR of 4.125%. The monthly payments would be $1,119, just a little lower than I was paying before. But, I would be guaranteed the APR will not change for the next five years and I would save $2,000 a month in expenses.
Since I'm planning on selling my house in about five years and I could also refinance again if I change my mind, I chose to move forward. I wouldn't normally be open to an adjustable-rate loan, but doing so in this case would achieve my short-term goals and give me options to change the loan in the long term. This was the right move for me.
The timing was also incredibly important. Thanks to COVID-19, business had already begun to slow down for me in January and coming up with the $7,000 to $8,000 in client work I would need to pay everything monthly was a long shot at best at least for part of the year. Now that I only need $1,500 a month to stay afloat, I am able to get through the COVID crisis when I have a week or two that aren't profitable.
Though refinancing my mortgage began as a necessity during my divorce, it ended up being a lifesaver for me in this new economy.
