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

Borrowers continued the conservative approachrnto refinancing they have exhibited since the housing crisis during the thirdrnquarter of 2013.  Freddie Mac said todayrnthat borrowers who refinanced with the company overwhelmingly chose the safetyrnof long-term fixed rates, frequently refinanced into shorter loan terms andrncontinued to eschew cash-out loans.</p

Withrnmortgage interest rates still floating near record lows the average homeownerrnwho refinanced during the quarter shaved 1.8 percentage points off of his loan,rnsaving $3,500 on a $200,000 mortgage over the next 12 months.  Homeownersrnrefinancing through HARP dropped their rate by an average of 1.9 percentagernpoints, saving about $320 per month.  Inrntotal third quarter refinancing saved homeowners an estimated $6 billion inrninterest over the next 12 months.</p

Thirty-seven percent of refinancersrnchose a shorter loan term compared to 32 percent in the second quarter and thernhighest percentage since 1992.  Fortyrnpercent of non-HARP borrowers took a shorter term as did 32 percent of HARP borrowers.  Only 4 percent of all refinances were forrnlonger loan terms.</p

Frank Nothaft, Freddie Mac vicernpresident and chief economist said, “With mortgage rates still near theirrnhistoric lows, 37 percent of refinancing borrowers chose to shorten their loanrnterm. Mortgage rates on 15-year fixed-rate loans averaged nearly a fullrnpercentage point below 30-year loans during the third quarter, providing arnfinancial incentive for homeowners to term shorten. HARP refinancers have anrnadditional incentive to shorten as some origination fees are waived. Byrnobtaining lower interest rates, borrowers will save approximately $6 billion inrninterest over the next 12 months, which they can put towards savings, payingrndown debt or supporting additional expenditures. Further, the estimated $6.4rnbillion in ‘cash-out’ activity will further augment borrowers’ investment andrnconsumption spending.” </p

Cash-out refinances remainedrnsubstantially below pre-recession levels both in number and in the amount ofrnequity taken out of homes.  Only 15rnpercent of borrowers substantially increased their loan balance throughrnrefinancing. Those that did increase the balance of conventional prime-creditrnhome mortgages cashed out an estimated $6.4 billion in net equity compared torn$84 billion  cashed out at the peak inrnthe second quarter of 2006.  </p

More than 95 percent of refinancingrnborrowers chose a fixed-rate loan. Fixed-rate loans were preferred regardlessrnof what the original loan product had been. For example, 86 percent ofrnborrowers who had a hybrid ARM refinanced into a fixed-rate loan during thernsecond quarter. In contrast, only 3 percent of borrowers who had a fixed-raternloan chose an ARM. </p

With mortgage rates remaining belowrn5 percent for most of the past four years, relatively few homeowners with loansrntaken in this period had much incentive to refinance. Consequently, the medianrnage the original loan increased to 6.7 years during the third quarter, the mostrnsince the analysis began in 1985.</p

Freddie Mac’s figures come from arnsample of properties on which Freddie Mac has funded two successivernconventional, first-mortgage loans, and the latest loan is for refinance ratherrnthan for purchase. During the third quarter of 2013, the refinance share ofrnapplications averaged 64 percent in Freddie Mac’s monthly refinance survey, andrnthe ARM share of applications was 7 percent in Freddie Mac’s monthly ARMrnsurvey, which includes purchase-money as well as refinance applications.

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