I had asked for advice a while back here so thought I would go ahead and update you guys on how things turned out.
We bought a house last April and put a lot into gut-renovating it. This is in an up-and-coming area where property values have doubled in the last decade or so and will probably double again in the next 20 years. We had financed 96.5% of the home (FHA first time homebuyer program).
This week we were able to refinance - the house appraised enough higher that we were able to get a traditional loan for 80% of the new amount, drop PMI ($178/month), drop our already-good interest rate by another 0.1%, get $10k cash out, and lower our monthly payment significantly.
So, it worked... sort of. FHA would not let us re-appraise and drop PMI so we did have to pay fees associated with refinancing through another institution, but the fees were less than the PMI we would have paid over the next 12 years so it was a no brainer. The cash will pay down some 0% interest debt we accrued doing the renovations. I had hoped to get more and be able to pay off everything we borrowed, but with our payment $200 less we should be able to pay down debts that much more quickly.
After years of dutiful saving and paying down debts ahead of schedule it feels weird to have even more debt and little savings, but it is wonderful to have our tiny dream house in time for a new baby, and payments that we can manage on one income if needed.