Self-employment offers some benefits. Both my husband and I work from home — me as a writer and blogger, and he as a consultant to new-car dealers. Seeing our kids growing up and having the ability to be present for their milestones (instead of stuck in traffic for an hour commute home) is wonderful. And I get to grow and develop my company, and that is an exciting process.
But being self-employed these days doesn’t seem like much of a perk. Health benefits are expensive and costly, and we have additional expenses because my spouse has Type 1 diabetes. Tax time causes me to cringe. And getting financed on anything can be difficult. So when we decided to refinance our home mortgage, I worried it would be difficult — if not impossible.
We bought our home back in 2004 at the height of the housing boom for $205,000. We financed the five-bedroom, four-bathroom rambler on an FHA adjustable-rate mortgage; the interest rate started at 4%. For the first year, we would pay $966 dollars, with the amount we were paying on our ARM going up each year for three years by approximately $200. After five years, we would level off and pay $1400 each month. Back then, down payments weren’t always necessary and many first-time homebuyers like us didn’t have too much more than a few thousand down in order to get approved. We opted for a 0% down option. At that time, both of us were also employed by corporations making it easy to refinance.
Living on the outskirts of Salt Lake City, Utah, home costs have fluctuated since the Great Recession of that started in 2004. Some areas were hit hard, while others not. Where we live, home prices have fallen, but we have had few foreclosures in our own immediate neighborhood and for the most part have seen little housing turnover. A call from my small firm mortgage broker about six months ago made it clear that refinancing could be a great option for us, saving us a few hundred dollars a month while not increasing our loan value. We decided to look into it more. We talked to our broker about some of the different options we had, researched on the internet, and got a second opinion from another mortgage broker at a larger firm. Things had changed dramatically for us since we first bought the home. Both of us had become self employed in 2012, making financing a little more difficult than before.
Right away we found that our self-employment was going to be a barrier in our getting approved. Because we were self employed only since late 2012, we didn’t have much verifiable income, and what we did was meager since we were just starting out. We were able to count my husband’s previous employer for some of our income, and had to present a business plan showing projected incomes and reduce our debt to income ratio since some of the business expenses were put on a combination of business and personal credit cards. Our debt to income ratio initially was 42% and in income just shy of $100,000 a year. With a high enough credit score and a reduced debt to income ratio we were told the approval process would be relatively simple.
We also had a few surprise debt collections from medical companies totaling around $2,500. (Not a surprise when you live with a chronic illness). After paying those off those within three months and getting letters that they were paid in full, we then focused on our debt-to-income ratio. We had approximately $10,000 in credit card debt. We paid off high-interest credit cards and paid down a large portion of credit card debt, most of which had been accumulated recently as we launched our businesses. To do this, I took on additional projects and my husband worked a second job. Combined, we were able to earn about $7,900. After 45 days, our credit score shot back up from the high 600’s to over 750 since we had fixed the collection issues and significantly reduced our debt to income ratio. We were ready to apply.
Once our finances were in order, the actual approval process went smoothly. We decided to refinance our home — which still had an original loan amount near $180,000 — to $200,000, so we could take out an additional $20,000 in order to help with business expenses and repairs on the house. During the recession boom we had also done some upgrades to our home, putting in a new sprinkler system, remodeling the bathrooms, putting in air-conditioning, finishing off the basement and redoing the entire kitchen. Because of this, we found our home value had increased, allowing us to take out the additional cash. We were able to qualify for 3.3 percent interest — down from 3.9 percent, coming down over half a point on a conventional ARM loan. We opted for another ARM loan since we were just recently self employed. We knew that as our income in our companies grew, so would our ability to pay more. We currently pay $1,100 a month now, down from $1,400. We are enjoying our new payment and saving a few hundred dollars per month that we pay into a retirement fund or pay down on our cars. By refinancing and consolidating our debt, we could save ourselves almost $200 a month, lower our interest payment from 3.9% to 3.3% (a savings of over half a percentage point) and only extend our loan payments by a few months. We weighed our options and then ultimately decided that for us, this would be the best route to go and would save us more in the long run.