Refinances in First Quarter Reduce Mortgage Payments by $2.5 Billion in Coming Year
A Borrower With A $200,000 Loan Lowers Monthly Payments by $160
April 30, 2009
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McLean, VA – In the first quarter of 2009, half of borrowers who refinanced their loan lowered their annual mortgage interest rate by at least 20 percent according to Freddie Mac's quarterly Refinance Report. The median ratio of new-to-old mortgage rate was 0.80, the lowest ratio since the third quarter of 2003, and corresponds to a new interest rate that is about 1.25 percentage points below the old rate. In the fourth quarter of 2008 the ratio stood at 0.92.
"Mortgage rates for conventional conforming 30-year fixed-rate loans reached 50-year lows in the first quarter of 2009 in Freddie Mac's Primary Mortgage Market Survey®, and averaged just 5.06 percent over the quarter with 0.7 points. With mortgage rates this low many people were able to make their mortgage payment a lot lower," noted Frank Nothaft, Freddie Mac vice president and chief economist. "The payment savings from ‘rate-and-term' refinancing done during the quarter is about $160 a month on a $200,000 loan and in aggregate this adds up to about $2.5 billion in extra spending cash in the pockets of those homeowners to spend over the coming year. If this pace keeps up for the rest of 2009, that will provide homeowners about $10 billion in mortgage-payment savings during the first year after refinance.
"In recent weeks mortgage rates in our weekly survey have stayed below 4.9 percent for a 30-year fixed-rate mortgage and when combined with the new streamlined refinance programs available to borrowers whose loans are owned by Freddie Mac or Fannie Mae, we expect refinance activity to be very high in the near term. These programs make it possible for borrowers with current loan-to-value ratios of up to 105 percent to qualify for a refinance that until recently they may not have been able to do."
The report also indicates that 58 percent of prime borrowers who refinanced a conventional, first-lien mortgage either kept the same principal balance or reduced it, up from a revised 45 percent in the fourth quarter. The share of refinance loans resulting in new loan amounts that were at least 5 percent higher than the paid-off first-lien mortgage balances fell to a five-year low of 42 percent in the first quarter; the fourth-quarter cash-out share was revised down to 55 percent.
"In the past two quarters, about $32 billion in home equity was cashed out by homeowners when they refinanced their home mortgage. This is the least we've seen over two successive quarters in the past eight years," said Amy Crews Cutts, Freddie Mac deputy chief economist. "We also saw a rise in the volume of home equity loans and lines of credit that were rolled into a new first lien during refinance. In the fourth quarter, $4.7 billion in second-lien debt was consolidated, increasing to $7.0 billion in the first quarter of 2009. Because second liens generally carry higher interest rates, the consolidation of $11.7 billion into a lower-cost first lien provides about $200 million in interest savings over the next year to these households."
These estimates come from a sample of properties on which Freddie Mac has funded at least two successive loans. Transactions are further screened to verify that the latest loan is for refinance rather than for home purchase.The Freddie Mac analysis does not track the use of funds made available from these refinances.
Quarterly Refinance Statistics
|Percentage of Refinances Resulting in:||Descriptive Statistics on Loan Terms and Property Valuation|
|Quarter||5% Higher Loan Amount1||Lower Loan Amount||Median Ratio of New to Old Rate2||Median Age of Refinanced Loan (years)||Median Appreciation of Refinanced Property|
1Higher loan amount refers to loan amounts that were at least 5 percent greater than the amortized unpaid principal balance (UPB) of the original loan. "Lower loan amount" refers to loan amounts that were less than the amortized UPB of the original loan.
2Ratio of new to old rate refers to the ratio of the interest rate of the new loan to the interest rate of the refinanced loan. Refinanced loans with adjustable-rate products are excluded.
Although Freddie Mac attempts to provide reliable, useful information in this document, Freddie Mac does not guarantee that the information is accurate, current or suitable for any particular purpose. The information is therefore provided on an "as is" basis, with no warranties of any kind whatsoever. Opinions and estimates contained in this document are those of Freddie Mac currently and are subject to change without notice. Information from this document may be used with proper attribution. Alteration of this document is strictly prohibited. © 2010 by Freddie Mac.
Freddie Mac was established by Congress in 1970 to provide liquidity, stability and affordability to the nation's residential mortgage markets. Freddie Mac supports communities across the nation by providing mortgage capital to lenders. Over the years, Freddie Mac has made home possible for one in six homebuyers and more than five million renters.