Freddie Mac has announced that in the third quarter of 2009, refinancing borrowers overwhelmingly chose fixed-rate loans, regardless of whether their original loan was adjustable-rate mortgage (ARM) or a fixed-rate. For the fourth consecutive quarter, more than 95 percent of prime borrowers who originally had a conventional ARM selected a new conventional fixed-rate mortgage when they refinanced, based on an analysis of loans purchased by Freddie Mac. While 30-year fixed-rate mortgages are the most preferred new product, 15-year fixed-rate mortgages gained favor among refinancers in the third quarter who previously held 30-year fixed-rate mortgages, balloon mortgages and ARMs.
“Low rates throughout all of 2009 have prompted about $1.1 trillion in refinancing activity this year, and we estimate that the borrowers who took advantage of refinancing opportunities in the first three quarters of the year will save about $10 billion in aggregate monthly payments over the first twelve months of their new loan,” said Frank Nothaft, vice president and chief economist for Freddie Mac. “Over the first nine months of this year, the average interest rate offered by lenders on 30-year fixed-rate loans was 5.1 percent, on 15-year fixed-rate loans was 4.7 percent, and on 5/1 hybrid ARMs was 4.9 percent according to the Primary Mortgage Market Survey. Because interest rates across fixed- and adjustable-rate products are similar and fixed-rate loans provide the benefit of a certain principal-and-interest payment, most borrowers have chosen fixed-rate loans.
“For borrowers who can swing the higher payments that come with shorter term mortgages, the interest savings really add up. The average fixed-rate refinance loan in the first three quarters of 2009 had a principal balance of about $225,000 and an initial interest rate of 6.25 percent. By choosing another 30-year fixed-rate mortgage, a borrower could lower their monthly payment by $160 per month and would accumulate $3,200 in equity through principal payments over the first year. In contrast, a borrower who chose a 15-year fixed-rate mortgage would have an even lower new interest rate but their monthly payment would rise by $350 per month; however, at the end of the first year they would have paid down $10,650 of the principal balance, thus building up home-equity wealth more quickly.”
These estimates 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.
For more information, visit www.freddiemac.com.