Refinancing Borrowers Shun ARMs in Q4. Opt for Shorter Loan Terms

Americansrnare increasingly turning away from variable rate mortgage products whenrnrefinancing according to the Quarterly Product Transition Report issued byrnFreddie Mac.  An increasing share of refinancing borrowers also chose to shorten their loan terms during the fourth quarter.  </p

In thernfourth quarter of 2010, fixed-rate mortgages (FRM) accounted for more than 95rnpercent of all loans used for refinance.  </p

Frank Nothaft, Freddie Mac vice president and chief economist commentedrnthat “Fixed mortgage rates continued to slide lower during the first part ofrnthe fourth quarter, reaching 4.17 percent for the 30-year mortgage inrnmid-November in Freddie Mac’s Primary Mortgage Market Survey® and the lowest fixedrnrates since the early 1950s.  It’s nornwonder borrowers are attracted to fixed-rate loans.</p

In the fourth quarter, thosernrefinancing a fixed rate mortgage usually selected another fixed rate mortgage with the same orrna shorter term.  </p

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. Eighty-seven percent ofrnthose with 15-year loans refinanced into the same type of product as did 67 percentrnof 30-year borrowers.  Of those who werernrefinancing from a 20 year however, 70 percent picked the shorter amortizationrnof a 15-year note. </p

The trend toward shorter terms also was clear in thern annual 2010 data. Overall, 2010 had the largest percentage of borrowersrn since 2003 who shortened their term when refinancing a long-term, fixed-rate loan. </p

Nothaft added, “The mortgage rate on 15-year fixed was about five-eights percentage point below that on 30-year fixed during the fourth quarter. 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.”</p

These estimates come from a sample of properties on which Freddie Macrnhas funded at least two successive loans and the latest loan is for refinancernrather than for home purchase. Where applicable, data include amortizing asrnwell as interest-only or option-payment loans. Some loan products, such asrn1-year ARMs and balloons, are based on a small number of transactions. Duringrn2010, the ARM share of all Freddie Mac applications was 6 percent includingrnboth purchase and refinance applications.</prnrnrn

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