Homeowners Continue Shorten Loan Terms, Saving Billions

Homeowners who refinanced in the first quarter of 2013 maintained the approximate cash balance of the loan they were refinancing but in more than one quarter of the cases, they shortened the term of their new loan.

Freddie Mac's quarterly refinance analysis showed that borrowers in the first quarter, taking advantage of record low interest rates, will save an aggregate of approximately $7 billion in interest over the next 12 months. These borrowers, by an overwhelming margin, opted to insure they will keep those rates as 95 percent chose fixed rate loans.

The cash-out refinancing boom which came to a screeching halt with falling house prices and stricter lending standards shows no sign of resurgence. The net dollars of home equity converted to cash through refinancing remained at a low consumer-price adjusted volume of $8.1 billion, about the same as in the fourth quarter of 2012. During the second quarter of 2006, at the peak of cash-out activity, borrowers took $84 billion in cash from their homes. Only about 15 percent of refinancing borrowers took cash out in the most recent period while about three percent lowered the principal balance of their mortgage by paying cash-in.

Twenty-eight percent of borrowers who refinanced during the quarter shortened their loans terms while 68 percent kept the same term and 3 percent opted for a longer term loan.

Loans through the Home Affordable Refinance Program (HARP) made up just over 20 percent of the refinance loans purchased during the first quarter by Freddie Mac and Fannie Mae. Property-value change, loan age, and rate reduction differed between refinancings under HARP and other refinances.

HARP loans evidenced a median depreciation in property value of 28 percent while properties refinanced through non-HARP programs had vary little change in value between the dates the old loans were put in place and the new loan was closed. Loans refinanced through HARP had a median age of about six years (to be eligible for HARP, the prior loan had to be originated before June 1, 2009), and the median for other loans was 4.1 years. HARP borrowers with a 30-year fixed-rate refinance (no product change) had an average interest-rate reduction of 2.1 percentage points other borrowers, in the same circumstances, had an average interest rate decline of 1.6 percentage points.

Frank Nothaft, Freddie Mac vice president and chief economist said, "Borrowers continue to strengthen their fiscal house by taking advantage of near record low mortgage rates. In total, borrowers who refinanced in the first quarter of this year will save approximately $7 billion in interest payments over the next 12 months, which they can put towards savings, paying down debt or to support additional expenditures. Further, the estimated $8 billion in 'cash-out' activity will further augment borrowers' investment and consumption spending."