Americans save billions every year simply by refinancing.

Why Americans have 5 billion reasons to refinance

By: James Abbey, January 22, 2016

If refinance rates weren’t beneficial to homeowners, no one would bother with them. That’s not a surprise. But what may be revealing is just how much homeowners have saved when taking advantage of the opportunity.

In 2014, the most recent year for available data, borrowers saved a combined $5 billion in lower interest payments, according to quarterly analysis data released by mortgage giant Freddie Mac.

Home equity can serve as a cash for homes strategy, which homeowners have parlayed into their advantage. Taking the last quarter of 2014 as an example, an estimated $6.7 billion in net home equity was cashed out after refinancing conventional prime-credit loans, Freddie Mac reported. Though considerable, that’s down from $7.6 billion compared to the previous three-month period.

Similarly, cashed out net home equity totaled $24 billion in 2014 overall. During the previous year, the total was $28.6 billion.

Borrowers shortened loan term
In addition to helping homeowners spend less on their mortgages, they’re also relieving their debt burden sooner. More than 1 in 3 borrowers in 2014’s closing quarter shortened their loan term, according to the lending giant’s analysis. The same was true for those using the government’s Home Affordable Refinance Program. About 35 percent of borrowers’ new mortgage estimate helped them move to a shorter term.

“Even 1 percent can result in tens of thousands in interest savings over the life of a home loan.”

In any measurement, tenths of a percent may not seem like much. It can be significant in the mortgage and refinancing arena, however. Take the fourth quarter of 2014 as an example. The average interest rate reduction for those refinancing was 1.3 percentage points, Freddie Mac documented. This means that with a $200,000 loan, the average borrower saved $2,500 in interest over the year. With a 30-year loan, that translates to $75,000 in savings on interest.

Len Kiefer, former deputy chief economist at Freddie Mac, pointed out that because mortgage rates have fallen, refinancings have risen.

“Lower mortgage rates, coupled with greater house prices appreciation last year, also brought about a larger share of borrowers cashing out home equity at the time of refinance,” Kiefer explained.

Mortgages maintaining sub 4 percent territory
Average mortgage rates were below 4 percent for most of 2015. The Federal Reserve says it will likely raise short-term interest rates in 2016, perhaps more than once. Thus far, however, 30-year fixed rate mortgages have mirrored last year’s. During the second full week of January, 30-year FRMs held at 3.9 percent, on par with the previous week. Last year, they were slightly lower at 3.6 percent.