Shorter Term Loans Save Serious Money

A Good way to save is to refinance into a shorter term to cut the total interest payments. For instance, you could ditch a 30-year-fixed mortgage for a 15-year loan. Say you have 25 years left on a $400,000 fixed-rate loan at 5 percent. By jumping into a 15-year fixed-rate mortgage at 3.375 percent, your monthly payment would jump by about $687, but you would save more than $200,000 in total interest payments.

Ellen Richard, a 34-year-old stay-at-home mom in Alameda County, traded in her 30-year fixed-rate mortgage at 5.5% for a 3.375 percent 15-year loan in December. Even though her monthly payments went up by $978.25, she will save $160,671 in interest over the life of her loan.

Already Near Bottom? When considering a refinance, of course, it is  important to factor in closing costs, marginal tax rates and the number of years left on your mortgage. Many experts say it doesn't make much financial sense to refinance unless you can reduce your rate by at least one point. Your "break-even" threshold, which is when the savings surpass your upfront costs, shouldn't exceed two years, experts say, unless you are sure you will remain in the house longer than that. To help defray the upfront costs, homeowners can try to persuade lenders to cover the bill for their fees. Regional lenders are more likely to agree to cover the costs on loans backed by Fannie Mae and Freddie Mac.

"It's in no way a freebie, but for some homeowners, it works," Mr. McBride says.