Homeowners who refinanced their mortgage in 2013 will save approximately $21 billion in interest over the first 12 months of their new loan, according to the "2013 Fourth Quarter Refinance Report" released by Freddie Mac in February.
Freddie Mac says the savings can be attributed to homeowners lowering their mortgage rates, shortening their loan term, and choosing fixed-rate loans.
Wondering if refinancing can save you money? Read on to find out how and why homeowners refinanced last year, and whether or not it makes sense for you in 2014…
Borrowers Continue to Take Advantage of Low Rates
Despite interest rates trending higher in the second half of 2013, Freddie Mac's Primary Mortgage Market Survey found that for the year as a whole, the 30-year fixed-rate mortgage averaged 3.98 percent.
"Rates have been at historic lows for an extended period of time," says Al Hensling, president of United American Mortgage Corporation. As a result, homeowners jumped at the chance to refinance to a lower rate before they increased.
So just how much did these homeowners save? Freddie Mac found that homeowners who refinanced their mortgage received an average interest rate reduction of about 1.9 percentage points, which equated to an average savings of about 33 percent for homeowners.
On a $200,000 loan, that 1.9 percent reduction will save homeowners $3,600 during the 12 months immediately following the refinance, says the report. That's $300 a month in savings over the course of a year.
Stephanie L. Jones, 36, from northwest Indiana, is one homeowner who will enjoy some of the $21 billion in savings.
Jones and her husband refinanced in 2013 and reduced their interest rate by 2.5 percentage points.
"Our original loan was in 2008 for $288,000 at 5.5 percent," says Jones. "We refinanced in 2013 for $238,000 at 3 percent."
Jones says their current mortgage balance is $162,000 on a 30-year term. Thanks to the savings they'll reap from their refinance, however, she and her husband have high hopes of paying off their mortgage fast.
"We have 29 years left and expect to pay it off in the next 2 years," says Jones. They also plan on using income tax refunds and commission and bonus checks to make aggressive extra payments.
Borrowers Choose to Shorten Their Mortgage Term
Of the group of borrowers who refinanced during the fourth quarter of 2013, 39 percent shortened their loan term (the highest since 1992), according to Freddie Mac.
A lower rate and a shorter term enticed one finance expert to refinance.
"I am both a real estate academic and a homeowner that refinanced within the last 8 months," says
Bennie Waller, PhD., professor of finance and real estate at Longwood University in Farmville, Virginia.
"We actually were able to refinance from a 20 year, 6.6 percent loan to a 15 year, 2.75 percent loan, lowering our monthly payments by almost $300 per month," says Waller.
And while the savings were great, Waller says the refinancing experience wasn't easy and expects it to only get tougher.
"It was a nightmare in terms of underwriting," he says. "We had to provide an incredible amount of verifications for various reasons," he recalls. Waller believes that the strict underwriting practices and increasing interest rates will make it harder for homeowners to refinance in the future.
So, for homeowners who are on the fence about refinancing, now is the time to do it.
Borrowers Opt for Fixed-Rate Mortgages
More than 95 percent of borrowers who refinanced in 2013 chose a fixed-rate loan, according to the Freddie Mac report. On the flipside, only 3 percent of borrowers who had a fixed rate refinanced into an adjustable-rate mortgage (ARM).
The Freddie Mac report notes that in 2013, borrowers were "overwhelmingly choosing the safety of long-term fixed-rate mortgages." This makes sense as rates are continuing to increase, making it only a matter of time before they shoot up to an unaffordable rate. By locking in a low fixed-rate mortgage now, homeowners can rest easy knowing that their monthly payments will remain the same for the duration of their loan.
Of course, for some homeowners, an ARM could still make sense.
"In order to make an informed decision, I always prepare a detailed break even analysis for clients," says Peter Grabel, a mortgage loan originator with Luxury Mortgage Corporation in Stamford, Connecticut.
Grabel cautions homeowners with ARMs against automatically choosing a fixed-rate mortgage when they refinance.
"We still see people who have ARMs that are close to the end of the fixed-rate period, who want to convert to a fixed-rate mortgage," he says. However Grabel says that in some high cost areas where super loans are common, this isn't always a good idea. Super loans are mortgages originated using higher maximum loan limits for high-cost areas, says Freddie Mac's website.
"At the super-jumbo level, common in the NY region, many people choose to do a new ARM (fixed for 10 years) rather than a 30-year fixed because there is a substantial spread in rate," says Grabel.
What Does This Mean for You?
If you can fall into any of the categories above - whether it's the ability to reduce your interest rate or lock in a low rate with a fix-rate mortgage - now is the time to refinance.
Rates are still in the 4s for 30-year loans and in the 3s for 15-year loans, but they may not be for long. Consult with a financial expert or mortgage lender to discuss your options and potential savings today.
How refinancing will save homeowners $21 billion this year