How We Lowered Our Monthly House Payments

It’s been a while since I checked in on the blog, and we’ve been pretty busy. Lots of plates are spinning in the air right now, but there’s some really exciting things in the works and I can’t wait to share them with you. In the meantime, we were able to stop spinning one of those plates by finally refinancing our house.

Refinancing to Eliminate PMI

We originally purchased our home on an FHA 203K loan that allows you to pay for a house and pay for improvements made to that house at the same time. In our case, we only made the minimum improvements because we wanted to do much of the work ourselves, and that kept our overall loan lower. A 203K loan can be great but it does come with some down sides, one of which is mortgage insurance. Because the borrower only puts 3.5% down on a 203k loan, premium mortgage insurance (PMI) is added to the monthly payment. It basically helps to insure the lender against the borrower defaulting on the loan. You can remove the mortgage insurance though if you can show that you’ve made improvements to your home that would raise its value by the standard 20% loan down-payment.

We worked with our previous lender and she walked us through the process. It’s largely like applying for any home loan. You have to present tax and work records that prove your income and you have to pay for a bunch of closing costs, one of which is an appraisal that will determine the current value of your property. Luckily, our lender financed our closing costs into our loan so we didn’t have to pay a dime out of pocket.

We thought that we had good enough credit and had made enough improvements that we could refinance with a lower interest rate and remove the PMI, but we were still a little nervous. After all, much of our house is still a construction site and we had only really finished a couple of rooms. Still, we knew that we had added a lot of value to the house and we had kept our initial loan low due to just covering the minimum projects. That made the amount for which we had to appraise significantly less than if we had opted to have all of the house projects financed through the original loan. All of these factors ended up working in our favor, and we did end up appraising for a large enough sum to cover the refinancing.

Things to Consider When Refinancing Your House

When you refinance, you can opt for different loan lengths and you’ll want to talk to your lender about what would work best for you. We could have refinanced for a 20 year loan and payed roughly the same monthly fee, but we really wanted to lower our monthly payments so we opted for another 30 year mortgage. We also wanted to refinance quickly before interest rates started to go up. They had already risen minimally and it looked like they would continue to go up. You want to ask your lender about that as well and make sure you can lock into an interest rate that will lower your payments.

The whole refinancing process took us about a month. From our initial application to the appraisal to the closing, it was a lot of back and forth and signing of a lot of documents. In the end though, we were able to knock a little more than $100 a month off of our payments. Woo Hoo! But, even though we were able to lower our payments, we didn’t have a completely smooth experience.

There are a lot of things that require double-checking when you refinance. As it turns out, one of those things for us was the direct deposit that was set up by our previous mortgage company. Even though that loan got payed off when we refinanced, the company auto-drafted a payment from our account. When I called them to ask about it, they said they had no record of the payment. Understandably, I was quite freaked out and I had to put in quite a few calls to my bank and the mortgage company over the course of a couple days. Finally, they did say that they had a record and would refund the money, but it would take a month to process. Arghhh!!!! It was a little infuriating, but we did get the money back, so it all worked out in the end.

There are many other variables that can go wrong so make sure you double check things like insurance and taxes after you refinance. Make sure that, if you have your taxes set up to come out of your mortgage, they actually are being deducted. One of my friends refinanced and only realized at the end of the year that they had not been paying their property taxes. They not only owed thousands of dollars in back taxes, they also had late fees. What a nightmare! Due to that horror story, I will be triple checking my bill each month.

Even though you need to stay organized and check for mistakes, I would still recommend refinancing if you can lower your interest rate or remove PMI. It was a lengthy process but we now have an extra $100 a month that we wouldn’t have before, and that lasts the life of our loan. When you add that up, we will have saved $36,000.00! Not too shabby and definitely worth some paper work. Still, refinancing is an individual process and each experience will have different benefits and risks. Make sure you talk to a trusted mortgage broker who can clearly lay out your options before you go down this road. If you do decide to refinance, good luck!