Long-term mortgage interest rates are at all-time lows today, with the average on a 30-year conventional fixed rate loan recently falling to 3.49 percent, according to mortgage finance company Freddie Mac. Moreover, the rate has not been over 4 percent since March of this year.
Of course, these insanely affordable interest rates are making refinancing very attractive to homeowners, as evidenced by data from the Mortgage Bankers Association last week, when refinance requests made up 81 percent of all mortgage volume. And the MBA also recently projected that a total of $932 billion in home loans will be refinanced this year, up from $858 billion in 2011.
Freddie Mac estimates that borrowers refinancing a $200,000 loan now will save roughly $3000 in interest during the next 12 months. And yet the financial experts are split as to whether these savings will translate into a boost to the greater economy.
“The initial benefit is not as significant as the large dollar-savings figures would seem to indicate,” said Mark Vitner, senior economist at Wells Fargo Securities LLC in a BusinessWeek article. “It does provide a benefit to the economy, but that benefit actually grows over time.”
And Paul Edelstein, director of financial economics at IHS Global Insight in Lexington, Massachusetts, said,
“If households are going to save $3,000 a year, I would expect that to make a difference. The problem is, in the current environment, a lot of that money may get saved or used to pay down other debt so the effect might be minor.”
Americans have been saving more lately. In June, the Commerce Department reported that the personal saving rate was up to 4.4 percent of their after-tax income, from 4 percent in May. By comparison, during the years right before the financial meltdown (2006 and 2007), households were only saving 2.5 percent.
Yet others like Susan Wachter, a professor of real estate and finance at the University of Pennsylvania’s Wharton School, believe that the interest savings will get pumped back into the economy.
“Three thousand dollars is not a small sum and it does make a difference,” said Wachter, a professor of real estate and finance at the University of Pennsylvania’s Wharton School in Philadelphia. “By no means is $3,000 going to be put entirely into savings.”
Mark Zandi, chief economist for Moody’s Analytics Inc. agrees.
“It provides a meaningful boost to the economy,” Zandi said. “It acts as a tax cut. If homeowners spend less on their mortgage, that opens up cash.”