The Advantages of Refinancing
by Tom on November 3, 2009
in Market Musings, Mortgage Matters
An interesting article at HousingWire about how people are saving money by refinancing. It’s interesting for what it says and what it doesn’t say.
What it says:
- On an annual basis, those who have refinanced recently are going to save approximately $3 Billion on their monthly payments.
- The average interest rate dropped by 17%. Not from 19% to 2%, but from 6% to just under 5%.
What it doesn’t say:
- If they are saving $3 Billion, who’s losing that money? How much would/could Fannie and Freddie have made/lost if they hadn’t refinanced?
- What sort of impact has that $3 Billion had on the overall economy? Has it increased consumer spending?
- What have the borrowers done with that savings? Have they paid down extra on their principal? Put the money in savings? Used it to pay off other debt?
- How many of the 94,000 borrowers who have refinanced were “saved” from foreclosure by means of the refinance? If we assume a $200,000 mortgage amount, a 1% drop in rate payment equals $125 per month in savings. Is that enough to make a difference?
Makes you wonder, doesn’t it?
Tom Vanderwell
Half of all borrowers that refinanced their conventional loans in Q309 saw their annual mortgage interest rate drop by at least 17%, according to a quarterly report by mortgage giant Freddie Mac (FRE: 1.15 0.00%).Although the new interest rate was only about 1.1 percentage points below the old rate, in aggregate the interest rate reduction adds up to around $3bn in savings for these borrowers over the first 12 months of the new loan, according to a survey of a sample of properties on which Feddie funded at least two successive loans.
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