Borrowers Stick with Safe and Steady Mortgages

Homeowners are turning almost exclusively to fixed rate loans for their refinance needs, according to new data from mortgage finance company Freddie Mac. Of all the refinance loans made in the first quarter of 2012, 95 percent of them were fixed rate mortgages, indicating borrowers desire for security and the attractiveness of long-term interest rates right now.

Those who already had a hybrid adjustable rate mortgage (ARM) tended to feel a bit more comfortable sticking with them, but still largely gave up ARMs for the consistency of fixed rate loans. Of those with hybrid ARMs who refinanced in the first quarter, 68 percent opted for a fixed rate mortgage, while 32 percent remained with an ARM product.

These numbers are dramatically different from the housing boom, when ARMs where extremely popular and the only affordable option for many. Record low rates are making fixed rate loans and even shorter term loans a nice choice for many now though. Out of all the borrowers who refinanced in the first quarter 31 percent chose to reduce their loan term from 30 years down to 20-year, 15-year, or shorter term loans.

“Compared to a 30-year fixed-rate mortgage, the interest rate on a 15-year fixed was about three-quarters of a percentage point lower during the first quarter,” said Freddie Mac vice president and chief economist Frank Nothaft in a press release. “For borrowers motivated to refinance by low fixed-rates, they could obtain even lower rates by shortening their term. Further, under the enhanced Home Affordable Refinance Program-HARP-announced by FHFA on October 24, 2011, certain risk-based fees are waived for HARP borrowers who refinance into shorter-term loans.”

He added,

“Fixed mortgage rates averaged 3.92 percent for 30-year loans and 3.19 percent for 15-year product during the first quarter in Freddie Mac’s Primary Mortgage Market Survey®, well below long-term averages. The Bureau of Economic Analysis has estimated the average coupon on single-family loans was about 5.1 percent during the first quarter of 2012. It’s no wonder we continue to see strong refinance activity into fixed-rate loans.”

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