Overwhelming Majority of Refinances are 30yr Fixed, no Cash-Out; 15yr Terms on the Rise

Borrowers continued the conservative approach to refinancing they have exhibited since the housing crisis during the third quarter of 2013.  Freddie Mac said today that borrowers who refinanced with the company overwhelmingly chose the safety of long-term fixed rates, frequently refinanced into shorter loan terms and continued to eschew cash-out loans.

With mortgage interest rates still floating near record lows the average homeowner who refinanced during the quarter shaved 1.8 percentage points off of his loan, saving $3,500 on a $200,000 mortgage over the next 12 months.  Homeowners refinancing through HARP dropped their rate by an average of 1.9 percentage points, saving about $320 per month.  In total third quarter refinancing saved homeowners an estimated $6 billion in interest over the next 12 months.

Thirty-seven percent of refinancers chose a shorter loan term compared to 32 percent in the second quarter and the highest percentage since 1992.  Forty percent of non-HARP borrowers took a shorter term as did 32 percent of HARP borrowers.  Only 4 percent of all refinances were for longer loan terms.

Frank Nothaft, Freddie Mac vice president and chief economist said, "With mortgage rates still near their historic lows, 37 percent of refinancing borrowers chose to shorten their loan term. Mortgage rates on 15-year fixed-rate loans averaged nearly a full percentage point below 30-year loans during the third quarter, providing a financial incentive for homeowners to term shorten. HARP refinancers have an additional incentive to shorten as some origination fees are waived. By obtaining lower interest rates, borrowers will save approximately $6 billion in interest over the next 12 months, which they can put towards savings, paying down debt or supporting additional expenditures. Further, the estimated $6.4 billion in 'cash-out' activity will further augment borrowers' investment and consumption spending."

Cash-out refinances remained substantially below pre-recession levels both in number and in the amount of equity taken out of homes.  Only 15 percent of borrowers substantially increased their loan balance through refinancing. Those that did increase the balance of conventional prime-credit home mortgages cashed out an estimated $6.4 billion in net equity compared to $84 billion  cashed out at the peak in the second quarter of 2006. 

More than 95 percent of refinancing borrowers chose a fixed-rate loan. Fixed-rate loans were preferred regardless of what the original loan product had been. For example, 86 percent of borrowers who had a hybrid ARM refinanced into a fixed-rate loan during the second quarter. In contrast, only 3 percent of borrowers who had a fixed-rate loan chose an ARM.

With mortgage rates remaining below 5 percent for most of the past four years, relatively few homeowners with loans taken in this period had much incentive to refinance. Consequently, the median age the original loan increased to 6.7 years during the third quarter, the most since the analysis began in 1985.

Freddie Mac's figures come from a sample of properties on which Freddie Mac has funded two successive conventional, first-mortgage loans, and the latest loan is for refinance rather than for purchase. During the third quarter of 2013, the refinance share of applications averaged 64 percent in Freddie Mac's monthly refinance survey, and the ARM share of applications was 7 percent in Freddie Mac's monthly ARM survey, which includes purchase-money as well as refinance applications.