Now what we didn't know and weren't informed was that our mortgage can fluctuate and increases each year
If you truly weren't informed of this then there could be fraud involved. You can try to talk to an attorney and see if there's a way to get out of it. If it is clear in your paperwork and you just didn't read it then you just got a bad mortgage.
is there any way I can just pay off the mortgage with a personal loan and pay the personal loan back instead and use the house as a collateral?
You don't want a personal loan. A personal loan has no collateral, and the interest rate will be much higher (if you can even get the loan). What you want is to refinance the mortgage. Get a FIXED RATE mortgage for no more than a 30-year term (get one for 15 years if you can afford the payment, but it sounds like you might be getting stretched thin). You might be able to roll in the closing costs into the new mortgage, but the key for you is the payment. Depending on the terms and interest rate, you may or may not be able to get a new mortgage that meets your budget.
You may also need to talk to your roommates about increasing the rent a little to help you through this. At the end of the day though, if you have more house than you can afford you may need to start looking for someplace cheaper. It's no fun, but sometimes these events are what force us to learn more about how mortgages, etc. work.
I rather invest the extra money going into flood insurance
If your lender requires that you have flood insurance, then you may NEED flood insurance. It means that there is a significant risk that a flood will damage or destroy your house. If that happens and you don't have flood insurance, you'll have to pay for the repair out-of-pocket.
You might be able to get out of it if you can prove that the structure itself is not in a flood plain. I would get the flood plain map online and compare it to where your house is. I did this for my mortgage when the property itself crosses the flood plain due to a creek, but the house itself is well above the flood elevation.