When my husband and I purchased a house in the Minneapolis suburbs in 2017, we were basically trying to get out of an expensive apartment in the city where our rent was $2,200 a month.
Because we had been spending half of our monthly income on rent, we couldn’t save much for a down payment — but we also didn’t want to keep spending money on an apartment without building equity. So we decided, with the little money we had set aside to put down, to buy a house.
The home we bought was in our price range — it was listed for $265,000, and we were pre-approved for $275,000 — but we were surprised by the amount of our monthly payments. We ended up with a house payment of $1,767, which increased to $1,790 when our property taxes went up this year.
On top of our principal (which is higher because we put less down), the biggest components in our payment were our mortgage interest rate (4.25%) and our private mortgage insurance ($165), which is required if you put down less than 20%.
After we paid off some credit card debt and started to earn more money, we wondered if we could refinance to save on our monthly payment. Luckily, our persistence in lowering our debt-to-income ratio paid off, literally: We just closed on our new, refinanced mortgage, and our house payment will soon be around $1,550.
Saving more than $200 per month is a great perk of refinancing, but I’m also surprised by how much I learned during the process (and how little I knew when we started).
You’re not locked into your mortgage interest rate
This may seem obvious, but when we bought the house in 2017 I assumed we were stuck with that interest rate. It wasn’t necessarily a bad rate, but it was representative of where we were financially at the time.
Fortunately, we’ve made some significant strides in paying down debt, and my husband and I both make quite a bit more money than we did when we took out our first mortgage.
While we were technically locked into our interest rate with the first loan, I didn’t realize another company could buy and pay off that loan, offering us a much better rate based on our financial state and the state of the market.
There was a lot of paperwork involved, but refinancing for a lower rate was worth the savings — our interest rate is now 3.375%.
Your PMI can significantly decrease when you refinance
Because our down payment was less than 20%, we got stuck having to pay private mortgage insurance on our loan.
I thought we’d pay that $165 every month until we paid 20% of our loan off, but when we refinanced, that amount decreased significantly — our new PMI payment will be $39 per month.
It’s cheaper now for a few reasons: With our new loan, we’ll have more equity in our house. We also got a lower PMI because our credit score is better and our debt-to-income ratio is a lot less than when we initially bought the house.
An appraisal amount won’t necessarily be the same as your home’s market value
I was shocked when our house was appraised for $306,000 — so much so I thought maybe we should put our house on the market to make some fast cash! Our loan officer quickly explained that what a home appraises for isn’t necessarily what it will sell for.
Your house is ultimately “worth” what someone will give you for it. If you live in a high-demand neighborhood where houses are getting multiple offers, you might sell your house for more than the appraised value.
The inverse can also be true: Our house might be “worth” $306,000 based on the appraiser’s research and comparable homes in the area, but I doubt anyone would actually pay that much for it since it only has one bathroom and our neighborhood isn’t in ultra-high demand at the moment. It may gain market value over time, though, so if we eventually decide to sell, the house could go for $306,000 or more.
Your loan amount can actually go up
Another thing I didn’t know: I assumed the only way to save money on a refinance would be with a smaller loan, but there are a lot of other factors at play.
In our case, since we decided to roll our closing costs into our loan, the loan amount went up. We’d paid the original loan down to about $250,000, but after the refinance, it went up to around $256,000 including closing costs. But we’re ultimately saving money every month because our interest and PMI decreased so much. The situation will vary for every homeowner.
You might not want to refinance if you plan to move soon
Around the time we began refinancing, my husband and I were entertaining the idea of selling our house in the next year or two — but our loan officer advised us against it.
When you refinance a home, just like buying a house, there are significant closing costs, which many borrowers roll into their loan rather than paying up front. If we were to sell our house with a $250,000 value, we wouldn’t make as much money. In many cases, it’s smarter to wait until you build more equity on the new loan before selling.