Freddie Mac has announced that in the second quarter of 2008, 97 percent of prime borrowers who originally had a one-year conforming adjustable-rate mortgage (ARM) chose a new conforming fixed-rate mortgage when they refinanced and 87 percent of prime borrowers that initially had a conforming hybrid ARM refinanced into a conforming fixed-rate loan as well. The revised comparable numbers in the first quarter were 92 percent and 80 percent, respectively. Furthermore, nearly all borrowers who had a fixed-rate loan refinanced into another long-term fixed-rate loan.
"Even though refinancing borrowers who take out a one-year adjustable rate mortgage (ARM) today would save about three-quarters of a percentage point in rate relative to a five-year ARM or 15-year fixed-rate mortgage (FRM), the concerns about inflationary pressures leading to future interest rate increases may be causing borrowers to choose the safety and certainty of fixed rates," said Frank Nothaft, vice president and chief economist for Freddie Mac. "In the second quarter, mortgage rates on all products crept up a bit, with 15-year fixed mortgage rates averaging 5.7 percent, the same as for a 5-1 hybrid ARM loan.
"Teaser rates on ARMs have largely disappeared. During the second quarter, the initial interest rate on one-year ARMs averaged three-tenths of a percentage point higher than the fully indexed rate. Without an extra discount ARMs just arent attracting many borrowers in todays market."
The fully indexed rate is the ARM's margin plus the one-year constant-maturity Treasury yield.
The Refinance Product Transition Report indicates that only one percent of borrowers who originally had a fixed-rate loan switched to an ARM loan. About one-half of borrowers with a 15-year fixed-rate loan refinanced back into the same product, with the other one-half choosing longer-term fixed-rate loans. Among borrowers who originally had a 30-year fixed-rate, three-of-four chose the same product at refinance, and the other quarter chose shorter-term fixed-rate loans.
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.