According to the Freddie Mac Quarterly Product Transition Report for the third quarter of 2011, fixed-rate loans accounted for more than 95 percent of refinance loans. Refinancing borrowers clearly preferred fixed-rate loans, regardless of whether their original loan was an adjustable-rate mortgage (ARM) or a fixed-rate.
Freddie Mac's Quarterly Product Transition Report comes 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 the third quarter of 2011, the refinance share of applications averaged 78 percent in Freddie Mac's monthly refi survey, and the ARM share of applications was seven percent in Freddie Mac's monthly ARM survey, which includes purchase-money, as well as refinance applications.
"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 (PMMS), well below long-term averages," said Frank Nothaft, Freddie Mac vice president and chief economist. "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."
An increasing share of refinancing borrowers chose to shorten their loan terms during the second quarter of 2011. 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 extension to the end of 2013 and additional enhancements to the Home Affordable Refinance Program (HARP) announced on Oct. 24, provide opportunities to eligible borrowers who had not yet refinanced," said Nothaft. "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."
Sixty-three 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.
"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," said Nothaft. "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."
