Nov 16 - In the third quarter of 2012, 29 percent of borrowers that refinanced an existing mortgage chose to shorten their loan terms, based on the Freddie Mac (OTC: FMCC) Quarterly Product Transition Report. Further, refinancing borrowers clearly preferred fixed-rate loans, regardless of whether their original loan was an adjustable-rate mortgage or a fixed-rate.
Of borrowers who refinanced during the third quarter of 2012, Freddie Mac found that 29 percent reduced their loan terms, while 68 percent of borrowers kept the same terms as the loan that they had paid off and 3 percent chose to lengthen their loan terms.
More than 95 percent of refinancing borrowers chose fixed-rate loans. Fixed-rate loans were preferred regardless what the original loan product had been. For example, 82 percent of borrowers who had a hybrid ARM chose a fixed-rate loan during the third quarter, the highest share since the second quarter of 2010, while the remaining 18 percent chose to refinance back into a hybrid ARM.
Those borrowers who refinanced under the Home Affordable Refinance Program were more likely to take out a long-term, fixed-rate mortgage. For example, 25 percent of HARP borrowers shortened their loan terms when they refinanced during the third quarter, compared with 31 percent of borrowers who refinanced outside of HARP. Further, of those borrowers who were refinancing out of an ARM, if they refinanced under the HARP program, then more than 95 percent chose fixed-rate mortgages; in contrast, of borrowers that had an ARM but did not refinance through HARP, about one-half opted for another hybrid ARM.
"Compared to a 30-year fixed-rate mortgage, the interest rate on a 15-year fixed was about 0.7 percentage points lower during the third quarter," said Frank Nothaft, Freddie Mac vice president and chief economist. "For borrowers motivated to refinance by low fixed-rates, they could obtain even lower rates by shortening their term. Further, a shorter-term, fully amortizing loan reduces the loan balance faster and builds home equity sooner.
"Fixed mortgage rates averaged 3.55 percent for 30-year loans and 2.84 percent for 15-year product during the third quarter in Freddie Mac's Primary Mortgage Market Survey, well below long-term averages and the lowest quarterly averages recorded in our survey. The Bureau of Economic Analysis has estimated the average coupon on single-family loans was about 5.0 percent during the third quarter of 2012. It's no wonder we continue to see strong refinance activity into fixed-rate loans."
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These estimates come from a sample of properties on which Freddie Mac has funded at least two successive loans and the latest loan is for refinance rather than for home purchase. Some loan products, such as 1-year ARMs and balloons, are based on a small number of transactions. During the third quarter of 2012, the refinance share of applications averaged 82 percent in Freddie Mac's monthly refi survey, and the ARM share of applications was 5 percent in Freddie Mac's monthly ARM survey, which includes purchase-money as well as refinance applications.