27% of Borrowers Refinanced into Shorter Term

by devteam February 13th, 2013 | Share

Freddie Mac borrowers who refinancedrnin the fourth quarter of 2012 overwhelmingly picked a fixed rate mortgage (FRM)rnand 27 percent of them chose to shorten their loan term.  Freddie Mac’s Quarterly Product TransitionrnReport released Tuesday said 69 percent of borrowers kept the same term as thernloan that they had paid off; 4 percent chose to lengthen their loan term, primarilyrnthose with 20 year terms, 22 percent of whom refinanced to 30 year mortgages.</p

More than 95 percent of refinancingrnborrowers chose a fixed rate loan as did an even larger percentage of borrowersrnwho already had an FRM.  Only 2 percentrnof borrowers with 15 year or 30 year FRM chose a hybrid adjustable raternmortgage (ARM).  Among borrowers with ARMsrn17 percent went from one hybrid loan to another and 18 percent of  those with 1-year ARMs moved to a hybrid. Virtuallyrnno one refinanced into a 1-year ARM but 83 percent of 1-year ARMs werernconverted into FRM, the highest percentage since the second quarter of 2010. </p

Those borrowers who refinanced underrnthe Home Affordable Refinance Program (HARP) were more likely to take out arnlong-term, fixed-rate mortgage than those who refinanced through a traditionalrnprogram. For example, of HARP borrowers who were refinancing out of an ARM,rnmore than 95 percent chose a fixed-rate mortgage; in contrast, of borrowersrnthat had an ARM but did not refinance through HARP, more than one-third optedrnfor another ARM. </p

Frank Nothaft, Freddie Mac vicernpresident and chief economist said, “Fixed mortgage rates averaged 3.36rnpercent for 30-year loans and 2.67 percent for 15-year product during thernfourth quarter in Freddie Mac’s Primary Mortgage Market Survey®, the lowestrnquarterly averages recorded in our survey. For borrowers motivated to refinancernby low fixed-rates, they could obtain even lower rates by shortening theirrnterm. Further, a shorter-term, fully amortizing loan reduces the loan balancernfaster and builds home equity sooner. </p

Based on 2012 calendar year data forrn12 large metropolitan areas, borrowers who lived in lower-priced areas wererngenerally more likely to shorten their term than those living in very high-costrnhousing markets. For the U.S. as a whole, 29 percent of borrowers shortenedrntheir loan term when refinancing but 43 percent of borrowers in the Dallasrnmetropolitan area shortened their term while only 14 percent of those in thernSan Francisco metropolitan area did so.</p

Nothaft said, “Borrowers withrnsmaller loan balances can shorten their loan term when refinancing with smallerrndollar increases in their monthly payment than borrowers with large loanrnbalances. That’s an important reason why a larger percent of borrowers in a lowrnhousing cost market shorten their term when compared to borrowers in very highrncost markets.” </p

Transition data come from a samplernof properties on which Freddie Mac has funded at least two successive loans andrnthe latest loan is for refinance rather than for home purchase. Some loanrnproducts, such as 1-year ARMs and balloons, are based on a small number ofrntransactions.

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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