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Borrowers Focus on Getting Their Fiscal Houses in Order

Chief Economist Frank E. NothaftWhether by cutting their interest rate or shortening their loan term, homeowners today continue to strengthen their fiscal house. In fact, more than three in four borrowers who refinance their home mortgage are keeping their loan balance about the same or reducing it.

That's one key finding of Freddie Mac's second quarter 2011 refinance analysis.

Savvy homeowners are taking advantage of some of the lowest fixed rates in more than 50 years to lock in interest savings. Rates that were already low at the time of our survey have continued to drop. In mid-September, the 30-year fixed-rate mortgage averaged 4.09 percent, breaking the previous record low of 4.12 percent set one week earlier. The 15-year fixed-rate mortgage averaged 3.30 percent.

In the second quarter, 77 percent of homeowners who refinanced their first-lien home mortgage either maintained about the same loan amount or lowered their principal balance by paying-in additional money at the closing table. Of these refinancing borrowers, 51 percent maintained about the same loan amount, and 26 percent reduced their principal balance.

Homeowners who refinanced lowered their interest rate on a 30-year fixed-rate mortgage by about 1 percentage point – a savings of about 18 percent in interest rate over the life of the loan. In just the first year following the refinancing, these borrowers will save over $1,550 in interest payments on a $200,000 loan.

The Cash-out Share of Refinancings Remains Historically Low
The Cash-out Share of Refinancings Remains Historically Low

 

"Cash-out" borrowers – those who increased their loan balance by at least five percent – represented only 23 percent of all refinance loans. In comparison, the average cash-out share during the 1985 to 2010 period was twice as much, at 46 percent. Taken together over the first two quarters of 2011 and adjusting for inflation, the amount of equity cashed out was at the lowest level in 15 years, since the second half of 1996.

The Dollar Amount of Equity Cashed-out in the First Half of 2011 Was Lowest in 15 Years
The Dollar Amount of Equity Cashed-out in the First Half of 2011 Was Lowest in 15 Years

 

A second Freddie Mac report found that 95 percent of refinancing borrowers chose fixed-rate loans in the second quarter of 2011. Whether their original loan was an adjustable rate mortgage or a fixed-rate, fixed-rate loans were clearly preferred when borrowers decided to refinance.

And the trend of borrowers shortening their loan terms continues. Of borrowers who paid off a 30-year fixed-rate loan, 37 percent chose a 15- or 20-year loan, the highest such share since the third quarter of 2003. Given the average market rates in our Primary Mortgage Market Survey, as of September 15, a borrower choosing to refinance could have a choice between a 30-year fixed loan at 4.09 percent and a 15-year at 3.30 percent; choosing the 15-year loan would result in a somewhat higher monthly payment, but also would translate into lifetime interest-payment savings of $93,649 on a $200,000 loan.

A refinancing that shortens the loan period and/or lowers the interest rate is one way homeowners are giving themselves some extra breathing room in a difficult economy. The trend is likely to continue until borrowers begin feeling more secure about their personal financial situations.


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