More Than 95 Percent Choose Fixed-Rate Loans
MCLEAN, VA – February 12, 2013 – (RealEstateRama) — In the fourth quarter of 2012, 27 percent of borrowers that refinanced an existing mortgage chose to shorten their loan term, based on the Freddie Mac (OTC: FMCC) Quarterly Product Transition Report released today. Further, refinancing borrowers clearly preferred fixed-rate loans, regardless of whether their original loan was an adjustable-rate mortgage (ARM) or a fixed-rate.
- Of borrowers who refinanced during the fourth quarter of 2012, 27 percent shortened their loan term, while 69 percent of borrowers kept the same term as the loan that they had paid off; 4 percent chose to lengthen their loan term.
- More than 95 percent of refinancing borrowers chose a fixed-rate loan. Fixed-rate loans were preferred regardless what the original loan product had been. For example, 83 percent of borrowers who had a hybrid ARM chose a fixed-rate loan during the fourth quarter, the highest share since the second quarter of 2010, while the remaining 17 percent chose to refinance back into a hybrid ARM.
- Those borrowers who refinanced under the Home Affordable Refinance Program (HARP) were more likely to take out a long-term, fixed-rate mortgage. For example, of HARP borrowers who were refinancing out of an ARM, more than 95 percent chose a fixed-rate mortgage; in contrast, of borrowers that had an ARM but did not refinance through HARP, more than one-third opted for another ARM.
- Based on 2012 calendar year data for twelve large metropolitan areas, borrowers who lived in lower-priced metropolitan areas were generally more likely to shorten their term compared to borrowers living in very high-cost housing markets. For the U.S. as a whole, 29 percent of borrowers shortened their loan term when refinancing. Whereas, 43 percent of borrowers in the Dallas metropolitan area shortened their term, compared with 14 percent of those in the San Francisco metropolitan area.
Attributed to Frank Nothaft, Freddie Mac vice president and chief economist:
- “Fixed mortgage rates averaged 3.36 percent for 30-year loans and 2.67 percent for 15-year product during the fourth quarter in Freddie Mac’s Primary Mortgage Market Survey®, the lowest quarterly averages recorded in our survey. 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.
- “Borrowers with smaller loan balances can shorten their loan term when refinancing with smaller dollar increases in their monthly payment than borrowers with large loan balances. That’s an important reason why a larger percent of borrowers in a low housing cost market shorten their term when compared to borrowers in very high cost markets.”
Quarterly Product Transition Information
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 fourth quarter of 2012, the refinance share of applications averaged 83 percent in Freddie Mac’s monthly refi survey, and the ARM share of applications was 4 percent in Freddie Mac’s monthly ARM survey, which includes purchase-money as well as refinance applications.
Freddie Mac was established by Congress in 1970 to provide liquidity, stability and affordability to the nation’s residential mortgage markets. Freddie Mac supports communities across the nation by providing mortgage capital to lenders. Over the years, Freddie Mac has made home possible for one in six homebuyers and more than five million renters. For more information, visit www.Freddiemac.com. Twitter: @FreddieMac