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More Than 95 Percent of Refinancing Borrowers Choose Fixed-Rate Mortgages

November 15, 2011

In the third quarter of 2011, fixed-rate loans accounted for more than 95 percent of refinance loans, based on the Freddie Mac Quarterly Product Transition Report. Refinancing borrowers clearly preferred fixed-rate loans, regardless of whether their original loan was an adjustable-rate mortgage (ARM) or a fixed-rate.

According to the report, 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.

The report also found that 63 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.

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,” said Frank Nothaft, Freddie Mac vice president and chief economist. "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.”

According to Nothaft, the extension to the end of 2013 and additional enhancements to the Home Affordable Refinance Program, announced on Oct. 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," Nothaft added.



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