refinance!
We recently closed on our refinance. That's seems kinda weird considering that we bought the house less than 2 years ago. But, as you know, interest rates are much lower now than they were a couple years ago. We bought the house with an 80/20 loan, 80% of the loan in a traditional mortgage and the other 20% in a home equity loan. We had a few goals when looking to refinance:
- Lower our monthly payment
- Get rid of the home equity loan with a rate that is due to adjust in ~8 years
- Lower the amount of total interest we'd be paying over the life of the loan
To be honest, we were already on track for goal numbers 2 and 3 without changing anything. We had been paying about $150 in extra principal every month and had a schedule to increase that amount as other money became available (like finishing paying off my student loans). This would have accomplished paying off the home equity loan before it's rate adjusted and we would have paid the whole house off in about 20 years instead of 30; saving us quite a bit in interest. So the main motivation was to lower our monthly payment while still holding onto those two other goals.
They say (not sure who 'they' are) that generally a refinance is worth it if you can go down a percentage point or more. Our mortgage loan was at a rate of 6.875% and our home equity loan was at at rate of 8.25%. We got a quote for an FHA loan refinance at 5.0%; that's a significantly lower rate!
So we had to have our house appraised to make sure that it made sense as collateral for the loan. We we're pretty hopeful considering the improvements we've made to the house, such as the completely new kitchen and appliances, new hardwood floors, new light fixtures, new patio, new paint, etc. Of course balancing all of this stuff out is the fact that the housing market has gone to crap in the last year or so. To our dismay, our house appraised at just $2,000 more than what we originally paid for it, we were expecting a bit more. What this meant, is that we would have to pay down an additional ~$1000 on our principal in order to get this new loan, additionally since our loan to value ratio was higher than 80% that means we get to pay PMI until it gets under that.
Even with these set backs, we still ended up saving around $160 per month in minimum payments. Since we were paying an extra $150 on top and I plan to shift that to only $50 per month additional we're actually saving $260 per month on our mortgage. We're also saving about $7,000 in interest over the life of the loan (on top of what we would have saved with our previous pre-payment plan), not a whole lot but it's something, of course this is assuming we never increase the amount of extra principal we're paying down each month. And of course our interest rate will never change so we don't have to worry about that either. In less than a year our monthly savings will have paid off the extra money it took to close. So overall a pretty good deal.
One thing to keep in mind with an FHA loan: FHA stands for Federal Housing Assistance, which means there is an insane bureaucracy pulling some strings on your loan. The government has some extra requirements that a private lender may not have. We ran into this with our loan. Our house has a wooden porch, it had been painted a number of years (decades?) ago and the paint was peeling off pretty badly. We hadn't addressed this because I'd prefer our house to look as miserable as possible from the exterior for the property tax assessor. Additionally there are other problems with the porch we wanted to address before bothering with repainting. Things like shoring up one of the sinking foundation posts, replacing rotting wood, etc. These plans were skewered by the FHA loan that required us to scrape the paint and repaint any exposed wood on the exterior of our house. That was a fun chore at the end of March in Wisconsin, let me tell you! We did manage to get it done between the rain and snow storms. So if you're looking into an FHA loan, keep in mind they may have some insane tasks for you to accomplish before they'll give you the loan.
