February 28, 2012 (Chris Moore)
Low mortgage rates continued to make fixed rate loans the overwhelming choice with borrowers who refinanced their home loans in the fourth quarter of 2011 according to Freddie Mac’s Quarterly Product Transition Report.
Over ninety-five percent of the borrowers who refinanced their existing first mortgage chose a fixed rate mortgage regardless of whether their previous loan was a fixed rate mortgage (FRM) or an adjustable rate mortgage (ARM).
Borrowers also continued to take advantage of the historically low interest rates and shortened the term of their loans at even higher rates in the fourth quarter than they did in the third quarter.
Forty-three percent of the borrowers who refinanced a 30-year FRM chose a 15-year or a 20- year mortgage to replace their original loan, the highest share of borrowers to do so since the third quarter of 2003, up from forty percent in the third quarter.
Borrowers who refinanced a hybrid ARM chose a fixed rate loan fifty-eight percent of the time during the quarter, down from sixty-three percent in the third quarter. Forty-two percent of borrowers who refinanced a hybrid ARM chose to refinance into the same type of product, up from thirty-seven percent in the previous quarter.
Frank Nothaft, vice president and chief economist of Freddie Mac, stated, “Fixed mortgage rates averaged 4.00 percent for 30-year loans and 3.30 percent for 15-year product during the fourth quarter in Freddie Mac’s Primary Mortgage Market Survey®, well below long-term averages. The Bureau of Economic Analysis has estimated the average coupon on single-family loans was about 5.2 percent during the fourth quarter of 2011. It’s no wonder we continue to see strong refinance activity into fixed-rate loans.”
Refinancing borrowers whose original loan was a 30-year FRM chose another 30-year FRM fifty-six percent of the time, a 20-year FRM sixteen percent of the time and a 15-year FRM twenty-seven percent of the time. That compares to fifty-eight, fifteen, and twenty-five percent, respectively, in the third quarter.
Borrowers who originally had a 15-year FRM chose to stay with that product ninety-one percent of the time while six percent lengthened the term of their loans to 30 years and one percent lengthened their loans to 20 years. That compares to eighty-seven, ten, and one percent, respectively, in the previous quarter.
“For borrowers motivated to refinance by low fixed-rates, they could obtain even lower rates by shortening their term. Compared to a 30-year fixed-rate mortgage, the interest rate on 15-year fixed was about 0.7 percentage points lower during the fourth quarter. And for borrowers who plan to remain in their current home for only a few years, the hybrid ARM allows for even a greater interest-rate savings. The initial interest rate on a 5/1 hybrid ARM was about 1.1 percentage points lower than on a 30-year fixed-rate loan.” Nothaft added.
Tags: Freddie Mac, refinancing borrowers, Transition Report, fixed rte mortgage, adjustable rate mortgage, hybrid ARM, interest rate savings