Over 95% of U.S. Refinancing Borrowers Choose Fixed-Rate Mortgages, 31% Shorten Loan Term

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According to Freddie Mac's Quarterly Product Transition Report released this week, in the first quarter of 2012, fixed-rate loans accounted for more than 95 percent of refinance loans. Refinancing borrowers clearly preferred fixed-rate loans, regardless of whether their original loan was an adjustable-rate mortgage (ARM) or a fixed-rate.

Freddie Mac's chief economist Frank Nothaft tells World Property Channel, "Fixed mortgage rates averaged 3.92 percent for 30-year loans and 3.19 percent for 15-year product during the first quarter in Freddie Mac's Primary Mortgage Market Survey, well below long-term averages. The Bureau of Economic Analysis has estimated the average coupon on single-family loans was about 5.1 percent during the first quarter of 2012. It's no wonder we continue to see strong refinance activity into fixed-rate loans."

Key Trends:

• Of borrowers who refinanced during the first quarter of 2012, 31 percent reduced their loan term by paying off a 30-year loan and replacing it with a 20-year, 15-year, or other shorter-term loan.  In addition, 66 percent of borrowers kept the same term as the loan that they had paid off.

• Sixty-eight percent of borrowers who had a hybrid ARM chose a fixed-rate loan during the first quarter, the highest share since the first quarter of last year, while the remaining 32 percent chose to refinance into the same type of product.

Nothaft further comments, "Compared to a 30-year fixed-rate mortgage, the interest rate on a 15-year fixed was about three-quarters of a percentage point lower during the first quarter. For borrowers motivated to refinance by low fixed-rates, they could obtain even lower rates by shortening their term. Further, under the enhanced Home Affordable Refinance Program--HARP--announced by FHFA on October 24, 2011, certain risk-based fees are waived for HARP borrowers who refinance into shorter-term loans."