The entire process to lowering my mortgage by almost half took about 5 months. It wasn’t easy. I had the money available to pay down the mortgage but I wasn’t about to empty my savings account. My wife was pregnant and I wanted her to have the option to stay home with the baby when the time came. We knew this would not be possible with our current monthly expenses. This is how the idea of dramatically reducing our mortgage payment came into play. There are several key steps that I took (drastic but necessary) to lowering the mortgage payment, here they are in chronological order:
Step one: Sell the house. Our 4 bedroom, 2 bath 1800 sq. ft. home (appraised value of $165,000) came with a mortgage payment of $1,100 a month. Our initial idea was to downsize to a smaller home however when doing research on the Internet we realized that we could find another house of similar size for much less. Home values have declined where we live (Overland Park, KS) over the past several years. It took a while but we did finally find a buyer and were happy to sell.
Step two: Find a deal. This involved looking at a lot of older homes that needed a great deal of work. Most of them were either a foreclosure or bank-owned. A majority of them needed a new roof, heating and a/c, kitchen cabinets, foundation work or completely new electrical or plumbing. Despite all this they all had one thing in common; they were all located on a quiet street in a good neighborhood. After searching for several weeks we finally found one we liked that didn’t have any major damage. It didn’t look pretty but you could tell there was a lot of value in the home. It was a 4 bedroom, 2.5 bath with an additional family room on the back. We purchased it for only $120.000.
Step three: Lower your taxes. The home we purchased was appraised the previous year for $205,000 however we purchased the house for only $120,000. This difference in valuation caused our property tax to be much higher at first. Luckily we had an appraisal from the bank and got our property tax adjusted to reflect our homes new fair value. Our property tax went from $2,400 to $1,400 a year.
Step four: Shop around for insurance. Our insurance premium on the house we sold was $1,400 a year. We thought we had a pretty low payment considering the coverage and value of the home but after shopping around with a local insurance broker we learned that the new house (which needed an estimated $240,000 coverage for replacement cost) was only going to be $900 a year. I was surprised at how drastic the difference was.
In the end after closing on our new home using a public notary and making a few adjustments to the escrow account, our mortgage payment went from $1,100 to $600 a month (our interest rate on the loan went from 5% to 3.5%). Our new home (appraised at only $120,000) has more square footage and numerous upgrades now. This whole process worked well for us because we knew we didn’t want to spend a lot of money. Aside from hiring a real estate agent and closing costs from buying the new house, it really didn’t cost us much to lower our payment. This was especially important to us as we really didn’t want to take anything out of our emergency savings.