Borrowers Save Billions By Refinancing Their Mortgages

(MoneyWatch)  Mortgage interest rates dropped to 50-year lows in 2009, and borrowers will save billions of dollars by refinancing, according to a new report from Freddie Mac.

According to Freddie Mac's quarterly Refinance Report, one-half of borrowers who refinanced their conventional loans lowered their annual mortgage interest rate by at least 17 percent, or about 1.1 percentage points below the old interest rate. (See my post on the Refinance Report from 1Q 2009 here.)

In the aggregate, the interest rate reductions add up to about $3 billion that these borrowers will save over the first 12 months of the new loan.

In a press release announcing the report's conclusions, Freddie Mac vice president and chief economist Frank Nothalf said that homeowners were benefiting from an extended period of very low interest rates.

"In the first nine month of 2009, interest rates on 30-year fixed-rate mortgages have averaged 5.1 percent, the lowest such average in the 38-year history of Freddie Mac's Primary Mortgage Market Survey," Nothalf noted.

Low interest rates would ordinarily spur a tremendous amount of refinancing activity. But the collapse of home values during the housing crisis meant few homeowners could refinance under traditional guidelines. Nothalf says from April through the end of August, more than 94,000 borrowers were able to refinance because of the Homeownership Affordability Refinance Program (HARP), according to the Federal Housing Finance Agency, with "the bulk of those occurring in July and August."

Freddie Mac's Refinance Report indicated that "64 percent of prime borrowers who refinanced a conventional, first-lien mortgage either kept about the same principal balance or reduced it, the highest such share in six years. Just 36 percent of homeowners did a "cash-out" refinance. Homeowners took out $20 billion in home equity, the lowest amount since 2000.

Every week on my radio show, I get calls from listeners asking if they should refinance. I tell them that refinancing is more than a water cooler discussion about who got the lowest interest rate. The Rule of Thumb has changed for mortgage refinance. You have to consider the following:

1. Can you lower your interest rate?
2. Can you lower your monthly payment?
3. Can you shorten the term of your loan? Shaving years off of your loan is worth doing, even if you can't lower your monthly payment.
4. How much will the refinance cost you? Lenders are changing a few hundred to a few thousands bucks to do a refinance. Shopping around will pay off big-time.

With money so tight for so many Americans, saving even a hundred dollars a month can be meaningful. Interest rates won't be at this low level for much longer - just maybe into the first part of 2010. If refinancing your loan makes sense, don't wait. Start the process now.

If you refinanced your loan in 2009, how much did you save? What was your original interest rate, your old payment, your new interest rate and your new payment?

Read More:

• Should You Refinance? The Rule of Thumb Has Changed
• To Refinance Or Not To Refinance: That Is The Only Question