How I Lowered My Monthly Mortgage Payments
Real Estate Down Payments
When purchasing a home, the first question people ask me or a lender is how much do I have to put down in cash? Purchasing a home can be intimidating and is one of the largest investments someone will make. The great news….there are a ton of different options! Whether you want to put 3%, 5%, 10%, 15%, 20%, or more down, is ultimately up to you and your financial position.
The caveat when thinking about down payment though is mortgage insurance. Any time you invest less than 20% into a home, you are going to have mortgage insurance added onto your loan by the investing lender. This is to help protect them from any defaults on your mortgage payments.
Conventional Mortgage Insurance vs. FHA Mortgage Insurance
If you purchase a property with a conventional loan, mortgage insurance will drop off automatically once you reach a loan to value ratio of 80/20. In other words, once you’ve paid off 20% of the valued principle of the property, your mortgage insurance will be removed and will reduce your monthly mortgage payments.
This is not the case, however, for FHA loans. With FHA loans, mortgage insurance will remain on the loan for the life of the loan. Whether that’s 15, 20, 25, or 30+ years, you will pay mortgage insurance for however long you own the home, or unless you decide to refinance to a conventional loan.
Refinancing From FHA to Conventional
This is what I did with my investment property in May of 2020. By refinancing my loan, from a FHA loan to a conventional loan, it helped me save approximately $300/month. I was able to capitalize on lower interest rates than my original loan was locked in at, and by refinancing, I was able to remove my mortgage insurance.
It does come at a cost though. By refinancing, you will incur closing costs of approximately 1%-2% of the appraised value of the property. This is due to appraisal fees, title fees, and government recording fees. Be sure to ask a title company and/or lender what your estimated closing costs will look like for refinancing. Also ask whether you’re able to roll in some or all of that cost into your loan so you don’t have to pay out of pocket.
Before and After Renovations
Loan Appraisal
This brings me to my next investing strategy. Although I purchased my investment property with a FHA loan and then refinanced to a conventional loan, I had a different strategy going into my personal home investment. I knew I wanted to hold onto some of my capital to finance renovations with cash savings. Instead of putting 20% down to be free of mortgage insurance, I only put down 5%.
The reasoning…by holding onto my cash and paying off renovations out of pocket, I knew the value of my home would increase substantially in a matter of months. By completely remodeling my kitchen, refinishing floors, updating light fixtures, paint and more, I understood my appraised value would naturally increase because of the monetary investment I was making.
Once all the work was complete, I reached out to my lender to ask for my loan to be placed under review. What this means is that I would be flagging my home to be put under review to see if the value has increased enough to remove my mortgage insurance.
Example:
Home Purchase Price: $535,000
Down Payment of 5%: $26,750
Renovation Cash Investment: $91,000
Total Cash Investment: $26,750 + $91,000 = $117,750
The caveat when you’re trying to determine your loan to value ratio is not to look at your original purchase price ($535,000) to determine if you’ve paid “down” 20% of the principle. Instead, you have to determine what the new appraised value of the home is. In my case, based on comparables in the area, the value I believed my home would appraise for was around $700,000. So, to ensure $700,000 is a high enough appraised value to warrant the additional fee of doing an appraisal (approx. $500), I calculated what my bottom line appraised value needed to be.
Example:
Outstanding Principle to be Paid off: $535,000 - $26,750 = $508,250
Needed Appraised Value: ($508,250/80) x 100 = $635,312
Based on this information and knowing that I invested close to $100,000 worth of improvements, I am confident the appraised value will come back high enough to knock off my mortgage insurance. This will then save me almost $200/month on my mortgage payments.
PRODUCTS THAT WILL GIVE YOUR HOME A VALUE ADDED FACELIFT:
With the help of a HELOC
On top of that, I will then be able to use a HELOC based on my new appraised value. Don’t know what that is? Be sure to check out my post explaining all the benefits! If all goes well, and it appraises around $700,000, I will be able to leverage a HELOC of around $180,000 for any future investments. Pretty great right?
The appraiser has come and gone, and now I’m just in a holding pattern. From a timing standpoint, I most likely will not get my appraisal results back for 2-3 weeks and then the bank I’m sure will need a couple more weeks to process any adjustments. So I will be “patiently” waiting for an update, hopefully sometime in January and I will keep you posted!
All the best!
Jen
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Investor // Landlord and DIYer // Realtor // Business Consultant // Globe Trotter // Converting Vegan.
