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How Much Can You Save on a Refinance?

Politicians don’t agree on much but there is a part of the new Obama administration stimulus package that has both Republicans and Democrats excited. Every American homeowner may qualify for it and most economists as well as the non-partisan Congressional Budget Office agree that not only will it not cost taxpayers anything, it may even save government sponsored companies Fannie Mae and Freddie Mac up to $100 million.

Many homeowners know the problem first hand. The housing market is in a slump. Some areas of the country have seen declines in the value of residential homes of more than 50%. Although politicians and the eternal economic optimists have said that in some areas home prices are making a rebound, in most cases, those reports are short-lived, untrue, or exaggerated. This isn’t a problem for those families who purchased at a low interest rate and don’t plan to sell their home for years or even decades but for everybody else, this has caused widespread economic disaster.

Why? Because the value of their home may be upside down meaning that they owe more on their mortgage than the actual value of the home. This makes it impossible to sell unless the homeowner is willing to sell their home and still have a mortgage payment. Second, it makes the home difficult to refinance since the value of the home is far less than the original note and even if the bank is willing to write down the mortgage, they will certainly take the opportunity to protect themselves from further value decline.

Homeowners who attempt to refinance report that banks are asking for as much as 1/3 of the value of the home as a cash down payment and without perfect credit, those nearly 4% interest rates aren’t offered. According to President Obama, for those who can qualify, they could save as much as $2,000 annually.

The New Plan
Using an existing federal refinancing initiative, the Home Affordable Refinance Program, the Federal Government will ask Fannie Mae and Freddie Mac to provide incentives for banks to refinance loans for all homeowners regardless of their credit history or home value. The program wouldn’t require large, if any money down, and it will lock in an interest rate around 4%. According to a Wall Street Journal blog [3], homeowners who are not up to date on their payments shouldn’t bother to apply until they are current. The program will run through 2013 so homeowners will have more than a year to catch up.

For those who have seen paychecks diminish or even disappear, an extra $200 per month could be enough of a financial cushion to curb the large amount of foreclosures that are causing Fannie and Freddie to bleed money. It would result in more revenue if mortgage lenders renegotiated the loan terms instead of foreclosing on the loans.

How can you figure out how much money you would save on a program like this? First, find you current interest rate. In 2008, the average 30 year mortgage interest rate was 7%. For homeowners who haven’t refinanced since 2008, they will see a substantial savings under this program. If you know your rate, find one of the many mortgage payment calculators online and compare your payment to an average payment with an interest rate of 4.5%. Don’t forget about the fees that may come with refinancing.

A lot of what happens in Washington doesn’t reach citizens in a real and practical way. This program, if it is enacted the way the Obama administration hopes, will put real money in to homeowners’ pockets. President Obama hopes that it will encourage spending. Consumer finance experts hope that it will cause consumers to save and pay off debt.