Homeowners who refinanced through
Freddie Mac in 2013 continued to display fiscal restraint, choosing fixed rate
mortgages, keeping essentially the same mortgage balance, and in many cases opting
for shorter-term loans to build equity more rapidly. In doing so homebuyers who refinanced during
the year will save approximately $21 billion on net over the first 12 months of
their new loans.
The results of Freddie Mac's fourth
quarter refinance analysis showed borrowers are continuing to take advantage of
low rates, with the refinancing shaving an average of about 1.5 percentage
points off of their old rate; or an average reduction of 25 percent. On a $200,000 loan this translates into
$3,000 in interest over 12 months. Homeowners
who refinanced through the Home Affordable Refinance Program (HARP) benefited
from an average rate reduction of 1.7 percentage points and will save an
average of $3,300 in interest during the first 12 months.
Thirty-nine percent of those who
refinanced during the fourth quarter of 2013 shortened the term of their loan
compared to 37 percent in the third quarter.
This was the highest percentage since 1992. Homeowners who refinanced through HARP
continued to take advantage of incentives offered by the program to shorten
loan terms with 42 percent choosing to do so compared to 35 percent of those
financing outside of HARP. Only 5
percent of borrowers picked longer loan terms for their new loans.
Only $6.5 billion in net home equity
was cashed out through refinancing in the fourth quarter compared to $7.1
billion in the third quarter. . The peak
in cash-out refinance volume was $84 billion during the second quarter of 2006.
Another $6.1 billion was used to consolidate home equity loan balances into the
first mortgage at the closing table. About
83 percent of those who refinanced their first-lien home mortgage maintained
about the same loan amount or lowered their principal balance by paying in
additional money at the closing table. That's just shy of the 88 percent peak
during the second quarter of 2012.
During the entire year the total
cash-out from refinancing was $32.1 billion compared to $320.5 billion during
the 2006 peak. Adjusted for inflation,
annual cash-out volumes during 2010 through 2013 have been the smallest since
More than 95 percent of refinancing
borrowers chose a fixed-rate loan. Fixed-rate loans were preferred regardless
of what the original loan product had been. For example, 94 percent of
borrowers who had a hybrid ARM refinanced into a fixed-rate loan during the
fourth quarter. In contrast, only 3 percent of borrowers who had a fixed-rate
loan chose an ARM.
The median age of a mortgage that was
refinanced during the quarter increased to 7.0 years, the oldest median since Freddie
Mac began its analysis. The company said
this reflected the duration of prevailing low interest rates; that is few
homeowners who took out their mortgages within the last four year have much
incentive to refinance.
Frank Nothaft, Freddie Mac vice
president and chief economist said, "Our latest refinance report shows the
refinance boom continued to wind down as the pool of potential borrowers
declined and as mortgage rates increased during the second half of 2013. We are
projecting the refinance share will be just 38 percent of all originations in
2014 as refinance falls off further and the emerging purchase market consumes a
bigger piece of the pie."
Freddie Mac's refinance analysis is
based on a sample of properties on which Freddie Mac has funded two successive
conventional, first-mortgage loans with the latest being for refinance rather
than for purchase. During the fourth quarter of 2014, the refinance share of
applications averaged 56 percent in Freddie Mac's monthly refinance survey, and
the ARM share of applications was 10 percent in Freddie Mac's monthly ARM
survey, which includes purchase-money as well as refinance applications.