Freddie Mac Refi Data Shows Continued Migration To 15yr Term

Freddie Mac reported on Tuesday that nearly a third of the borrowers who refinanced their loans in the third quarter chose new loans with a shorter maturity.  Twenty-nine percent of all refinancing borrowers chose a shorter term, but borrowers who refinanced through the Home Affordable Refinance Program (HARP) were actually less likely to shorten their loan term than other borrowers.  Despite incentives to do so, only 25 percent of HARP borrowers chose to reduce the length of their mortgage compared to 31 percent of borrowers in non-HARP Freddie Mac programs. Only 3 percent of all borrowers chose to lengthen their loan's term.

With rates so low there is little to attract refinancers to adjustable rate mortgages (ARM) and 95 percent of all refinancing borrowers did opt for a fixed rate product.  For example, 82 percent of borrowers who had a hybrid ARM chose a fixed-rate mortgage (FRM) 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.   Fifty-four percent of borrowers leaving their one year ARM behind took out a 15-year FRM, 23 percent choose a 30-year FRM and 19 percent went into a hybrid; none chose another 1-year ARM.   Sixty-seven percent of borrowers with 30-year fixed rate mortgages (FRM) refinanced into the same type of loan.

HARP borrowers also differentiated themselves from other borrowers in the type of loan they took.  More than 95 percent of HARP borrowers with an existing ARM chose an FRM as their new loan compared to only about half of non-HARP borrowers with an ARM.

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

Information on refinancing 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.