Freddie Mac: 27% of Borrowers Refinanced into Shorter Term

Freddie Mac borrowers who refinanced in the fourth quarter of 2012 overwhelmingly picked a fixed rate mortgage (FRM) and 27 percent of them chose to shorten their loan term.  Freddie Mac's Quarterly Product Transition Report released Tuesday said 69 percent of borrowers kept the same term as the loan that they had paid off; 4 percent chose to lengthen their loan term, primarily those with 20 year terms, 22 percent of whom refinanced to 30 year mortgages.

More than 95 percent of refinancing borrowers chose a fixed rate loan as did an even larger percentage of borrowers who already had an FRM.  Only 2 percent of borrowers with 15 year or 30 year FRM chose a hybrid adjustable rate mortgage (ARM).  Among borrowers with ARMs 17 percent went from one hybrid loan to another and 18 percent of  those with 1-year ARMs moved to a hybrid. Virtually no one refinanced into a 1-year ARM but 83 percent of 1-year ARMs were converted into FRM, the highest percentage since the second quarter of 2010.

Those borrowers who refinanced under the Home Affordable Refinance Program (HARP) were more likely to take out a long-term, fixed-rate mortgage than those who refinanced through a traditional program. 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.

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

Based on 2012 calendar year data for 12 large metropolitan areas, borrowers who lived in lower-priced areas were generally more likely to shorten their term than those living in very high-cost housing markets. For the U.S. as a whole, 29 percent of borrowers shortened their loan term when refinancing but 43 percent of borrowers in the Dallas metropolitan area shortened their term while only 14 percent of those in the San Francisco metropolitan area did so.

Nothaft said, "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."

Transition data 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.