Borrowers are continuing to take advantage of near-record-low mortgage rates to lower their monthly payments and shorten their loan terms – and are overwhelmingly choosing the safety of long-term fixed-rate mortgages, according to Freddie Mac's quarterly refinance analysis of the third quarter of this year.
According to the results, of borrowers who refinanced during the third quarter, 37% shortened their loan term – up 5% from the previous quarter and the highest since 1992. Forty-percent of those who refinanced outside of Home Affordable Refinance Program (HARP) took out a shorter-term loan, while 32% of HARP borrowers shortened their term. Borrowers who kept the same term as the loan that they had paid off represented 59%; only 4% chose to lengthen their loan term.
The net dollars of home equity converted to cash as part of a refinance remained low compared to historical volumes, says Freddie Mac. In the third quarter, an estimated $6.4 billion in net home equity was cashed out during a refinance of conventional prime-credit home mortgages. (The peak in cash-out refinance volume was $84 billion during the second quarter of 2006.) Adjusted for inflation, annual cash-out volumes during 2010 through 2013 have been the smallest since 1997.
The results also show that the average interest rate reduction was about 1.8 percentage points – a savings of about 30%. On a $200,000 loan, that translates into saving about $3,500 in interest during the next 12 months.
For all borrowers who refinanced during the third quarter, the estimated interest savings over the next 12 months will be about $6 billion. Homeowners who refinanced through HARP during the third quarter of 2013 benefited from an average rate reduction of 1.9 percentage points and will save an average of $3,850 in interest during the first 12 months – or about $320 every month, according to Freddie Mac.
About 85% of those who refinanced their first-lien home mortgage maintained about the same loan amount or lowered their principal balance by paying additional money at the closing table – which is just shy of the 88% peak during the second quarter of 2012, the results reveal.
More than 95% of refinancing borrowers chose a fixed-rate loan. Fixed-rate loans were preferred, regardless of what the original loan product had been, says Freddie Mac. For example, 86% of borrowers who had a hybrid adjustable-rate mortgage (ARM) refinanced into a fixed-rate loan during the second quarter. In contrast, only 3% of borrowers with a fixed-rate loan chose an ARM.
With mortgage rates remaining below 5% for most of the past four years, relatively few homeowners with loans taken in this period would have much incentive to refinance, says Freddie Mac. Consequently, the median age the original loan was outstanding before refinance increased to 6.7 years during the third quarter – the highest since the analysis began in 1985.