Home Refinance Borrowers Prefer Fixed-Rate Mortgages with Shorter Terms

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According to Freddie Mac's (OTC: FMCC) Quarterly Product Transition Report released today. In the first quarter of 2011, fixed-rate loans accounted for more than 95 percent of refinance loans.

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

An increasing share of refinancing borrowers chose to shorten their loan terms during the first quarter. Of borrowers who paid off a 30-year fixed-rate loan, 34 percent chose a 15- or 20-year loan, the highest such share since the first quarter of 2004.

Freddie Mac chief economist Frank Nothaft said, "Fixed mortgage rates averaged 4.85 percent for 30-year loans and 4.12 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 6 percent at the end of 2010. It's no wonder we continue to see strong refinance activity into fixed-rate loans."

Eighty-four percent of borrowers who had a hybrid ARM chose to refinance into a fixed-rate product during the first quarter, continuing a pattern of the past few years of borrowers revealing a strong preference for fixed-rate over variable-pay contracts.

Nothaft further stated, "The mortgage rate on 15-year fixed was about three-fourths percentage point below that on 30-year fixed during the first quarter. For borrowers motivated to refinance by low interest rates, they could obtain even lower rates by shortening their term. In the first quarter we saw the largest share of borrowers shortening their term while refinancing in seven years."

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