First Person: I Couldn’t Afford My Home Until I Refinanced

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I'm a big believer in living by sound personal finance rules. However, I never heard of the rule to put down 20 percent on a home and only borrow no more than two times our household income. Looking back on our new construction home purchase in 2007, we couldn't really afford the $183,000 selling price. However, by the time we refinanced earlier this year, we were finally able to afford our own home. Knowing what makes a home affordable has prevented us from becoming move-up buyers. We know if we sold now and took out a new mortgage, we'd just be back in the same position we were in several years ago. For years, we didn't realize it, but we were house poor.

Putting down 20 percent

When we purchased our new construction home, we were able to put down 20 percent. In order to get the money together, we lived with relatives as we saved. We also sold our townhome, which gave us about $25,000 that we could put toward our new home purchase. If we wanted to buy a new home now, it would be extremely difficult to come up with a 20-percent down payment on a more expensive home. That's because we only have about $15,000 of equity in our home due to the housing crash. After paying closing costs, we wouldn't even be able to put down 10 percent on a new home.

Borrowing two times our income

Because our income is higher now than it was 8 years ago, we could afford to buy a home in the $200,000 to $250,000 range. However, most of the nicer houses in our area are priced more in the $300,000 to $350,000 range. When we purchased our new construction home, we got carried away by the competitive housing market. New home builders raised the prices on homes at regular intervals. We competed with other buyers because there was a shortage of inventory. We didn't even think about whether or not we could truly afford the house we purchased.

Refinancing for a fresh start

When we refinanced earlier this year, we were able to start fresh with a new mortgage. Our balance was about $100,000 when we refinanced to a 15-year fixed rate mortgage, which gave us extremely affordable payments of $900 a month. Not only do we have lower monthly payments, but we also have a low interest rate of 2.75 percent. I followed another personal finance rule by switching to a 15-year mortgage. I've often heard that a true sign of being able to afford a home is being able to comfortably pay off the mortgage in 15 rather than 30 years. Our goal was to make sure we don't have a mortgage by the time we retire.

Now that we have such an affordable monthly house payment, we have a lot more discretionary money every month. My husband is able to spend the extra money to travel. I'm able to spend the extra money on small renovations to our house. When our home is paid off, we will have all kinds of options of what to do with our extra money.

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