Over 95% of U.S. 'Refi' Borrowers Selected a Fixed-Rate Mortgage in 3Q

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Based on the Freddie Mac's latest Quarterly Product Transition Report, fixed-rate loans accounted for more than 95 percent of refinance loans in 3Q, 2011.

Refinancing borrowers clearly preferred fixed-rate loans, regardless of whether their original loan was an adjustable-rate mortgage (ARM) or a fixed-rate.

Frank Nothaft, Freddie Mac's chief economist tells the World Property Channel, "Fixed mortgage rates averaged 4.29 percent for 30-year loans and 3.47 percent for 15-year product during the third 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 5.3 percent during the third quarter of 2011. It's no wonder we continue to see strong refinance activity into fixed-rate loans."

Nothaft further states, "Compared to a 30-year fixed-rate mortgage, the interest rate on 15-year fixed was about 0.8 percentage points lower during the third quarter. For borrowers motivated to refinance by low fixed-rates, they could obtain even lower rates by shortening their term. The initial interest rate on a 5/1 hybrid ARM was about 1.2 percentage points lower than on a 30-year fixed-rate loan. For borrowers who plan to remain in their current home for only a few years, the hybrid ARM allows for even a greater interest-rate savings."

The report shows that an increasing share of refinancing borrowers chose to shorten their loan terms during the second quarter. Of borrowers who paid off a 30-year fixed-rate loan, 40 percent chose a 15- or 20-year loan, the highest such share since the second quarter of 2003.

Additionally, sixty-three percent of borrowers who had a hybrid ARM chose a fixed-rate loan during the third quarter, while the remaining 37 percent chose to refinance into the same type of product.

Nothaft concludes, "The extension to the end of 2013 and additional enhancements to the Home Affordable Refinance Program, announced on October 24, provide opportunities to eligible borrowers who had not yet refinanced.  More than 900,000 borrowers have already refinanced via the Program through September.  The enhancements provide incentives for eligible borrowers to shorten their loan terms, from 30 years to 20- or 15-years."

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