Freddie Mac reported on Tuesday that
nearly a third of the borrowers who refinanced their loans in the third quarter
chose new loans with a shorter maturity.
Twenty-nine percent of all refinancing borrowers chose a shorter term,
but borrowers who refinanced through the Home Affordable Refinance Program (HARP)
were actually less likely to shorten their loan term than other borrowers. Despite incentives to do so, only 25 percent
of HARP borrowers chose to reduce the length of their mortgage compared to 31
percent of borrowers in non-HARP Freddie Mac programs. Only 3 percent of all
borrowers chose to lengthen their loan's term.
With rates so low there is little to
attract refinancers to adjustable rate mortgages (ARM) and 95 percent of all
refinancing borrowers did opt for a fixed rate product. For example, 82 percent of borrowers who had
a hybrid ARM chose a fixed-rate mortgage (FRM) during the third quarter, the
highest share since the second quarter of 2010, while the remaining 18 percent
chose to refinance back into a hybrid ARM. Fifty-four percent of
borrowers leaving their one year ARM behind took out a 15-year FRM, 23 percent
choose a 30-year FRM and 19 percent went into a hybrid; none chose another 1-year
ARM. Sixty-seven percent of borrowers with
30-year fixed rate mortgages (FRM) refinanced into the same type of loan.
HARP borrowers also differentiated
themselves from other borrowers in the type of loan they took. More than 95 percent of HARP borrowers with
an existing ARM chose an FRM as their new loan compared to only about half of
non-HARP borrowers with an ARM.
Frank Nothaft, Freddie Mac vice
president and chief economist said, "Compared to a 30-year fixed-rate mortgage,
the interest rate on a 15-year fixed was about 0.7 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.
Further, a shorter-term, fully amortizing loan reduces the loan balance faster
and builds home equity sooner.
Information on refinancing come from
a sample of properties on which Freddie Mac has funded at least two successive
loans and the latest loan is for refinance rather than for home purchase. Some
loan products, such as 1-year ARMs and balloons, are based on a small number of