February 16, 2011 (Jeff Alan)
In the fourth quarter of 2010, fixed-rate loans accounted for more than 95 percent of refinanced loans, based on the recently released Freddie Mac quarterly Product Transition Report. Refinancing borrowers overwhelmingly chose fixed-rate loans, regardless of whether their original loan was an adjustable-rate mortgage (ARM) or a fixed-rate. That’s due in part to borrowers becoming more conservative in their loan choices since the economic downturn began. But it’s also due to some of the lowest interest rates in half a century, which made fixed-rate loans an easy choice for borrowers to make.
An increasing share of refinancing borrowers also chose to shorten their loan terms during the fourth quarter. 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.
“It’s no wonder borrowers are attracted to fixed-rate loans,” said Frank Nothaft, chief economist for Freddie Mac. “Fixed mortgage rates continued to slide lower during the first part of the fourth quarter, reaching 4.17 percent for the 30-year mortgage in mid-November in Freddie Mac’s Primary Mortgage Market Survey® and the lowest fixed rates since the early 1950s.
Interest rates on 15-year fixed-rate mortgages were running about five-eights of a percentage point below that of the 30-year loan, Nothaft said, meaning that borrowers motivated to refinance by low interest rates could reduce them even more by opting for a shorter term.
But ARMs have been making a bit of a comeback lately. Since mortgage interest rates have started rising again since the middle of January, ARMs market share has been increasing weekly. With 5 year ARMs recently running about a full percentage point below the 30 year fixed mortgage rate, borrowers are expected to start finding them more attractive.
Tags: freddie mac, mortgage loans, adjustable rate mortgages, fixed rate mortgages, borrowers, lowest fixed rates, interest rates