A sharp decline in mortgage rates means that every homeowner should immediately review possible refinance options. With rates at their lowest since Freddie Mac started tracking historical rates in 1971, consumers have been presented with an unprecedented money-saving opportunity.

Mortgage Rates Drop Like Rocks (or Fruitcakes)

From the end of October through mid-December, 30-year mortgage rates fell by approximately a full percentage point. Homeowners with solid application packages--sufficient equity, excellent credit, and stable income--are being offered lower rates than ever before (since Freddie Mac began tracking rates in 1971). Consumers have lost no time taking advantage: mortgage applications more than doubled in the week ending November 28^th, led by a tripling in mortgage refinance applications.

The Mortgage Bankers Association (MBA) keeps close track of mortgage application data and consumer behavior. "Many borrowers missed an opportunity to take advantage when rates dropped sharply for a brief period when the GSEs [government sponsored enterprises] were placed under conservatorship," said Orawin Velz, Associate Vice President of Economic Forecasting. Today's rates present an even better opportunity for those who missed the first round of rate decreases.

Refinancing from ARM Loans to Fixed Rate Mortgages

If you have an adjustable-rate mortgage, take note that spreads between adjustable rates and fixed rates have narrowed. For example, a typical ARM available at a large bank, based on a 6-month LIBOR index and carrying a 2.25% margin, would be changing to 4.78% if adjusting on December 12, 2008. That same bank offers a 30-year fixed rate loan at less than 5% to its grade-A customers. The advantage is in the opportunity to lock in a refinance rate at historically low levels. Unless you plan to unload your home in the next year or two, it makes sense to eliminate the risk of rate increases while it's so cheap to do so.

Paying Off Your Mortgage: Faster and Cheaper

Shorter mortgages can offer extra bargains if you can afford to make a slightly higher mortgage payment. You may be able to get an especially low refinance rate by trading the remainder of your 30-year mortgage for a 15-year mortgage. The difference between a 15 year and 30 year mortgage rate typically ranges between .25 and .50%. The real bargain, however, is the tens or hundreds of thousands less you pay in interest over the life of the loan.

Getting the Cash You Need

If you have enough home equity and foresee needing cash in the near future, consider refinancing for more than needed to pay off your current mortgage. You can pay less interest than with your current mortgage and effectively lock in a low rate for anticipated needs like home improvement, investing, college tuition, medical expenses, or debt consolidation. This is a good move for planned, necessary expenses--not for impulse buying.  

If you are considering refinancing, you may not want to delay.

Get some quotes online or in person right away to see if you could benefit from refinancing. The avalanche in refinance applications means it may take some time to get your mortgage processed. And the steep plunge in interest rates may be very short-lived. This is one case in which it probably won't pay to dither.