Refinancing Borrowers Overwhelming Pick Shorter Term Loans

As we see each week in the Mortgage Bankers Association's application survey, few borrowers chose adjustable rate mortgages when buying or financing a home.  This is borne out by Freddie Mac's Quarterly Product Transition Report which found that 95 percent of borrowers who were refinancing during the fourth quarter of 2011 chose a fixed rate loan as their new mortgage.

Virtually none of the borrowers who refinanced a traditional one-year adjustable rate mortgage (ARM) chose to replace it with another one, although slightly over a third traded for a hybrid ARM which have a fixed rate for a period of three, five, seven, or 10 years and then usually convert to a loan that adjusts every year.  Forty-two percent of borrowers with a hybrid ARM refinanced into another hybrid of some type.  About 3 percent of FRM borrowers refinanced into hybrids.

More borrowers chose shorter term loans in Quarter Four.  Forty-three percent of borrowers who refinanced a 30-year FRM chose a 15 or 20 year variety, the highest percentage on record, and 77 percent with a 20-year traded it in for a 15 year.  Only about 19 percent of fixed-rate borrowers picked longer-term loans when refinancing.

Fourth Quarter Refinance Transition Figures

Frank Nothaft, Freddie Mac vice president and chief economist said "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."

Freddie Mac's transition estimates come from a sample of properties on which it 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 2011, the refinance share of applications averaged 81 percent in and the ARM share of applications was 7 percent according to data from Freddie Mac weekly and monthly surveys.