When refinance mortgage rates drop, homeowners who lower their monthly payments free up cash that can be spent elsewhere in the economy. Today's refinancing homeowners are more likely to refinance in order to shorten mortgage terms or consolidate debt. No matter how you could use extra cash, it's worth the time to determine whether a refinance is right for you.

Mortgage Refinancing Can Provide Economic Stimulus For Millions

During the last mortgage refinance boom in the early 2000s, homeowners collectively saved more than $61 billion in interest payments, reported the Wall Street Journal. Much of this extra money in homeowners' wallets was put right back into the economy, which helped fuel economic growth.

As mortgage rates continue to drop, economists debate how much a new refinancing boom might help the economy achieve a much-needed recovery.

Mortgage refinance activity has potential to rival other stimulus

According to the Wall Street Journal, economists at Morgan Stanley have calculated that if half of the mortgages backed by Fannie Mae or Freddie Mac were refinanced to today's low refinance mortgage rates, it would free up $46 billion a year for people to spend.

Just how big is that $46 billion cash injection? It's more than the $34 billion in income derived from the recent extension of long-term jobless benefits--and nearly equal to the expansion in private-sector wages and salaries since December 2009, when employers began to add workers again.

Refi boom is different this time around

Unlike the refi boom in the 2000s, this year's refinancers won't be taking out huge sums of cash. Last time, in addition to the savings generated by the lowering of mortgage interest rates and payments, homeowners also cashed out lots of equity and spent the money lavishly. According to one Fed survey, 51 percent of the cash-out money was used to fund home improvements or other consumer goodies, and only 26 percent was used to repay other debt.

Many of today's refinancing homeowners will do the opposite, choosing to bring cash in to shorten their mortgage term or eliminate mortgage insurance. One-third of refinancing borrowers have elected to change from a 30-year home loan to a 15- or 20-year mortgage. And 22 percent sought to lower their principal balance by paying in additional cash when the new mortgage closed. In fact, the percentage ofrefis that were "cash-in" is near record highs, according to Freddie Mac.

There is a whole lot less cash-out this time, and those who choose to take cash out will likely do so for debt consolidation, in an attempt to make their debt loads more manageable.

The future of refinancing

What this new attitude means is that this refinancing boom will probably not immediately boost consumer spending and economic growth the way refinance activity did last decade.

But in this era of unemployment unease, the benefit from paring down debt could still yield significant benefits in the next year or two. As households lower their debt levels, consumer confidence should increase, and with it should come consumer spending and a more sustainable recovery.

How to take advantage of favorable refinance mortgage rates

Even if you refinanced in the last year or two, consider having your situation evaluated by an experienced mortgage professional. You may be able to save even more by following the example of many folks and exchanging your 30-year mortgage for a 15-year loan. The mortgage rate is lower (about half a percent lower than a comparable 30-year loan), and you'll be able to accelerate your home loan payoff.

Another option to look into is the 5/1 hybrid adjustable-rate mortgage (ARM), which have fixed interest rates for five years that are, on average, 1 percent lower than 30-year rates. These days, it's possible to pay less than 3.5 percent interest on a mortgage that's fixed for five years.

What you should do next

To see whether a mortgage refinance just might be your own economic stimulus plan, start by entering your home loan details into a refinance calculator to determine what the potential savings could be. Then get on GuidetoLenders.com to find a refinance mortgage lender to help you take the next steps.