Fixed Rates Remain the Dominant Choice Among Refinancing Borrowers

In the fourth quarter of 2011, fixed-rate mortgages (FRMs) accounted for more than 95 percent of refinance loans, based on the Freddie Mac Quarterly Product Transition Report. An increasing share of refinancing borrowers chose to shorten their loan terms during the fourth quarter of 2011 as well. Of borrowers who paid off a 30-year FRM, 43 percent chose a 15- or 20-year loan, the highest such share since the first quarter of 2003. "Fixed mortgage rates averaged four percent for 30-year loans and 3.30 percent for 15-year product during the fourth 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 5.2 percent during the fourth quarter of 2011. It's no wonder we continue to see strong refinance activity into fixed-rate loans." Fifty-eight percent of borrowers who had a hybrid adjustable-rate mortgage (ARM) transitioned to an FRM during the fourth quarter, while the remaining 42 percent chose to refinance into the same type of product. "For borrowers motivated to refinance by low fixed-rates, they could obtain even lower rates by shortening their term," said Nothaft. "Compared to a 30-year fixed-rate mortgage, the interest rate on 15-year fixed was about 0.7 percentage points lower during the fourth quarter. And 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. The initial interest rate on a 5/1 hybrid ARM was about 1.1 percentage points lower than on a 30-year fixed-rate loan."