Lower your Expenses: Refinance your Mortgage

Taking advantage of historically low mortgages rates with a refinance mortgage could save you thousands on your mortgage loan.

When the economy throws you lemons, why not make some low-mortgage-payment lemonade? Mortgage rates are holding steady in the sub-5 percent range, which may mean it's a great time to lock in a refinance mortgage loan.

Mortgage rates very attractive

According to Freddie Mac's Weekly Mortgage Market Survey, mortgage rates on 30-year, fixed-rate loans averaged 4.84 percent during the week ending May 7, 2009. Although this is up slightly from April's ultra-low mortgage rates, anything below 5 percent is still a great bargain by historic standards. 

If you have sufficient equity in your home, there's a good chance that you can lower your monthly expenses with a mortgage refinance. A recent refinance activity report from Freddie Mac indicates that many homeowners are doing just that. Some 50 percent of mortgage borrowers who refinanced in the first quarter of this year were able to reduce their mortgage rates by 20 percent; that's the difference between a 6 percent rate and a 4.8 percent rate. While those borrowers probably incurred some closing costs associated with the new loans, their annual savings should be substantial enough to repay those costs and start accruing savings in short order.

Making the call on your mortgage 

How do you know if now's the time to pull the trigger on a refinance mortgage? Start by finding out what your current loan balance is, relative to the value of your home. If it's 80 percent or less, you have lots of options. If it's between 80 percent and 105 percent, you'll have to see if you qualify for a Home Affordable refinance. And if it's more than 105 percent, you'd have to pay down your mortgage balance with cash to refinance. That may not be a bad idea, depending on your financial situation-but talk with a trusted financial advisor before proceeding.

Next, think about how long you plan to stay in the home. Because refinance mortgages come with closing costs, you don't start saving money on that lower payment until you've repaid the upfront costs of the loan. Also, when estimating closing costs, remember to account for any prepayment penalties on your existing mortgage.

Dollars and cents

Calculating your potential refinance mortgage savings can be somewhat complicated. First, you need to know what mortgage rates would be available to you.  Many factors can cause your mortgage rate to be higher than what's currently available to the most creditworthy borrowers. You might have a credit issue, you might have a large loan balance, or you might want to cash out some equity. Try talking to a few lenders to get a realistic perspective on your particular situation.

If you can lower your current mortgage rate by 1 percentage point, you'll save about $64 per payment for every $100,000 of mortgage debt. In this economy, those savings sound about as refreshing as a tall, cool glass of lemonade.