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If you’ve wondered about refinancing your home, this is definitely the moment to look into it. If you’re like many other American homeowners, locking in a lower interest rate right now could save you thousands.
The housing market is recovering and mortgage rates are still in the basement.
But interest rates won’t stay that way forever and already are creeping up from historic lows.
“Mortgage rates dropped sharply at the end of 2014, breathing new life into the refinance market,” Leonard Kiefer, deputy chief economist at Freddie Mac, said in a recent analysis. Refinances made up about 52 percent of single-family home loan originations in 2014.
“Borrowers who refinanced in 2014 will save on net approximately $5 billion in interest over the first 12 months of their new loans,” Kiefer reported.
For the first time since 2009, the median appreciation of a refinanced property in 2014 turned positive, meaning that over half of all borrowers who refinanced saw their home equity increase since taking out their original loan, Kiefer said.
For those refinancing in the fourth quarter of 2014, the average interest rate reduction was about 1.3 percentage points. On a $200,000 loan, that translates into mortgage interest savings on average of about $2,500 during the next 12 months, Kiefer said.
In February 2015, according to Freddie Mac, the average interest rate on a 30-year fixed mortgage was 3.71 percent, up from 3.61 percent a month earlier.
The February rate still was considerably lower than it was six years earlier, in February 2009, when mortgages averaged 5.13 percent. Six years is the average age of a loan refinanced, Freddie Mac says.
The monthly payment on what was a typical $165,000 mortgage in 2009 would have been $899, according to an HSH.com refinance loan calculator. If you refinance now for the remaining balance of $148,460 for 24 years (the rest of the original loan’s term), the 1.52-percentage-point difference in the rate would mean a new monthly payment of $779, or a savings of $120 a month, if there were no costs associated with the loan. Adding typical loan refinancing costs of about $2,970 would make the payment $795, still a monthly savings of $104, or nearly $30,000, over the life of the new loan.
About one in three homeowners refinancing in 2014 took out shorter-term loans, allowing them to pay down principal and build home equity faster than on their previous loans, Kiefer noted.
That tactic should save you money in the long term, but your monthly payment could go up.