Refinance at 3.2 percent? One homeowner did it.

Sarita Harbour
Wondering how you can save by cutting your mortgage costs? Here are four stories of how homeowners did it.

Are you looking for ways to cut your mortgage costs?

Though the economy is improving, money is still tight for many homeowners, and mortgage costs can be a big expense for many families. In fact, from the third quarter of 2011 to the second quarter of 2012, American consumers spent anywhere from 32 to 38 percent of their income on housing, according to the U.S. Department of Labor's "Consumer Expenditures Survey".

Given the hefty bite that housing takes from family income, it is no wonder homeowners want to cut their mortgage costs. So we talked to several individuals who did just that. Though their situations and refinancing techniques varied, all of our homeowners were able to get a lower interest rate and save money on their mortgage.

Want to learn how these homeowners cut their high mortgage costs? Keep reading to find out.

Savings Strategy: Switching to a Shorter-Term Loan

Name: Chris Reining 
Location: Madison, Wis.

How would you like to pay refinancing costs and increase your monthly mortgage payment to save money? Sounds crazy, right?

The truth is that doing just that may actually help cut your mortgage costs in the long run. That is exactly what Chris, the thirty-something Madison, Wis. founder of the personal finance blog,, discovered when he refinanced his own mortgage.

The original amount that Chris took out for his mortgage was $180,000, with a 30-year term and an interest rate of 5.63 percent. When he went to refinance, he took out the new loan for $160,000, and switched to a 15-year loan with an interest rate of 3.25 percent.

Though his refinancing costs were approximately $1,000, when he calculated how much he'd save by going to a lower rate, Chris found it was worth it. In fact, within seven months, he was able to recoup the costs of refinancing.

And even though his monthly payment increased, the significantly lower interest rate on the 15-year loan didn’t cause his monthly payment didn't change by much.

"While I pay a little more per month now, about $100, the benefit is that my mortgage will be paid off in close to half the time," Chris explains.

But the savings didn't stop there. "Over the next five years, refinancing will both save me $13,429 and reduce my loan balance by $46,000," Chris says.

"I'd recommend - with mortgage rates at historic lows, to take the time and effort to talk to a loan officer about refinancing your mortgage," Chris says. "We might never see rates this low again in our lifetime."

[Thinking about refinancing to a shorter-term loan? Click to compare rates from lenders now.]

Savings Strategy: Switching Lenders for a Lower Interest Rate

Name: Tracy Bagatelle-Black
Location: Los Angeles, Calif.

It may be difficult for homeowners to consider leaving their current mortgage lender, especially if you've had the mortgage for a long time.

However, refinancing to cut mortgage costs may mean leaving your current lender - whether by choice or necessity. This was the case for Tracy, a 40-something Los Angeles area public relations consultant.

"I refinanced my mortgage last year because I had to for a divorce," she explains. When her existing lender wouldn't remove her ex-husband from the loan, and didn't provide an explanation as to why they wouldn't, she called Merrill Lynch, who holds her investments. "I am so glad that I did because I wound up saving a ton of money," she says. In addition, they had no problem qualifying her for a mortgage on her own - without her ex-husband.

In Tracy's case, she shaved almost 1 percent off her current interest rate, lowering her long-term mortgage interest costs significantly by going from a rate of 5.125 on a 30-year fixed-rate loan to 4.19 percent on a 15-year fixed loan.

It gets even better. Despite going to a shorter-term mortgage, her monthly payments are actually less now than they were with the 30-year mortgage.

"I'm saving $90 per month," she says. "Plus I cut my repayment time in half. I was on a 30-year loan, but now I'm on a 15-year loan."

Savings Strategy: Using HARP to Refinance an Underwater Mortgage

Names: John and Carol
Location: Oakland, Calif.

Is your current mortgage owned or guaranteed by Freddie Mac or Fannie Mae, or insured through the FHA?

For Freddie Mac and Fannie Mae mortgages, as long as your payments are up-to-date and the value of your mortgage is more than 80 percent of the current value of your home, you may qualify to refinance to a lower rate under the Home Affordable Refinance Program (HARP), says the program's official website.

John and Carol, an Oakland, California couple in their forties, were recently able to take advantage of this program. John works in construction and Carol works for a large telecommunications company, and they've lived in the same three-bedroom home for over 20 years. The original loan they took out on their home was for $260,000.

Joe Parsons, owner/manager of PFS Funding, a small mortgage banker in Dublin, California, has worked with John and Carol for over 15 years.

"Because of the decline in real estate values, [John and Carol's] loan balance is quite a lot higher than the value of their home," says Parsons. "They had resigned themselves to their high rate of 6.875 percent and the payment of nearly $1,800."

Luckily, John and Carol qualified under the HARP program to cut their mortgage costs significantly. Their new loan, which was for $266,000, was approved with minimal paperwork, and their rate dropped nearly three full percentage points to 4.125 percent. Their monthly payment dropped from $1,800 per month to $1,536 - a savings of over $300 per month, says Parsons.

"Under the latest iteration of HARP, John and Carol were able to refinance without regard to the appraised value of their home - in fact, an appraisal was not necessary at all."

[Ready to refinance your mortgage? Click to compare rates from lenders now.]

Savings Strategy: Using an FHA program to get a Better Interest Rate

Names: Mike and Christine
Location: San Francisco, Calif.

While HARP helps many underwater homeowners, it isn't the only government program homeowners can take advantage of. Homeowners with up-to-date Federal Housing Administration (FHA) insured mortgages may also qualify to refinance to a lower rate through what's called a Streamline Refinance. This is what Mike and Christine, a San Francisco couple in their 30s did, and they saved big bucks in the process.

Mike and Christine bought their new home about four years ago with a loan amount of $688,000, using an FHA loan and a 3.5 percent down payment, says Parsons. At the time they got an interest rate of 5.75 percent, and their monthly payments including taxes, insurance, and mortgage insurance, was $5,485 per month.

"Mortgage insurance at that time was .55 percent," Parsons says, "and it has risen since then."

Mike, who works in mid-management for a high-tech company, and Christine, who is a new mother, qualified for an FHA streamline refinance under a recently-enacted program so their mortgage insurance premium would remain at the low rate they had initially, Parsons explains.

"Their new loan was at 3.75 percent. Because of the large drop in the [interest] rate, together with the size of the loan ($684,500), their payment dropped dramatically - from $5,485 to $4,380. That was a drop of over $1,000 per month."