More Refinancing Borrowers Opt for 15-, 20-Year Terms

A bigger share of refinancing borrowers chose to shorten their mortgage loan terms during the fourth quarter, with 43 percent opting for a 15- or 20-year loan – the highest such share since the first quarter of 2003, Freddie Mac reports.
In the fourth quarter of 2011, fixed-rate mortgages accounted for more than 95 percent of refinance loans, based on Freddie Mac’s quarterly report on mortgage products.
Refinancing borrowers clearly preferred fixed-rate loans, regardless of whether their original loan was an adjustable-rate mortgage (ARM) or a fixed-rate.
But there is also a definite trend toward reducing debt and saving interest by shortening the timetable of mortgages for those homeowners who qualify for refinancing.
Historically low interest rates accounted for much of the surge in shorter terms.
Fixed mortgage rates averaged about 4 percent for 30-year loans and 3.30 percent for 15-year products during the fourth quarter. Rates for both products are currently at or below those levels.
“For borrowers motivated to refinance by low fixed-rates, they could obtain even lower rates by shortening their term,” said Frank Nothaft, Freddie Mac vice president and chief economist. “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.”
Borrowers planning to remain in their current home for only a few years can save even more on interest with the hybrid ARM.
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.
Fifty-eight percent of borrowers who had a hybrid ARM transitioned to a fixed-rate loan during the fourth quarter. The remaining 42 percent chose to refinance into the same type of product.

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