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Freddie Mac Study Finds Fixed-Rates Preferred Over ARMs for Refis

Feb 16, 2011

In the fourth quarter of 2010, fixed-rate loans accounted for more than 95 percent of refinance loans, based on the Freddie Mac Quarterly Product Transition Report. Refinancing borrowers overwhelmingly chose fixed-rate loans, regardless of whether their original loan was an adjustable-rate mortgage (ARM) or a fixed-rate. The report also found that an increasing share of refinancing borrowers chose to shorten their loan terms during the fourth quarter. Of borrowers who paid off a 30-year fixed-rate loan, 32 percent chose a 15- or 20-year loan, the highest such share since the first quarter of 2004. Of borrowers who refinanced a 20-year loan, 70 percent chose a 15-year loan, the highest such percentage found in Freddie Mac's quarterly analysis. "Fixed mortgage rates continued to slide lower during the first part of the fourth quarter, reaching 4.17 percent for the 30-year mortgage in mid-November in Freddie Mac's Primary Mortgage Market Survey and the lowest fixed rates since the early 1950s," said Frank Nothaft, Freddie Mac vice president and chief economist. "It's no wonder borrowers are attracted to fixed-rate loans." The trend toward shorter terms also was clear in the annual 2010 data. Overall, 2010 had the largest percentage of borrowers since 2003 who shortened their term when refinancing a long-term, fixed-rate loan. "The mortgage rate on 15-year fixed was about five-eights percentage point below that on 30-year fixed during the fourth quarter," said Nothaft. "For borrowers motivated to refinance by low interest rates, they could obtain even lower rates by shortening their term. In 2010 we saw the largest share of borrowers shortening their term while refinancing since 2003." 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. Some loan products, such as one-year ARMs and balloons, are based on a small number of transactions. During 2010, the ARM share of applications was six percent in Freddie Mac's monthly ARM survey, which includes purchase-money as well as refinance applications. For more information, visit www.freddiemac.com.
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Feb 16, 2011
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