95% of Borrowers Refinancing to a Fixed-Rate Mortgage

Freddie Mac announced today that 95% of borrowers who refinanced a mortgage in the third quarter of 2009 refinanced to a fixed-rate mortgage from an adjustable rate mortgage. 

Most refinancers choose a 30-year fixed-rate mortgages over all other mortgage types. 15-year fixed-rate mortgages gained in popularity among people who refinanced in the third quarter who previously held 30-year fixed-rate mortgage, balloon mortgages or an adjustable rate mortgage.

Home-owners are taking advantage of near record low mortgage interest rates and refinancing to fixed rate products from riskier adjustable rate mortgages. A smart move to refinance to fixed mortgages since mortgage rates are expected to head higher in the coming year.

“Low rates throughout all of 2009 have prompted about $1.1 trillion in refinancing activity this year, and we estimate that the borrowers who took advantage of refinancing opportunities in the first three quarters of the year will save about $10 billion in aggregate monthly payments over the first twelve months of their new loan,” said Frank Nothaft, vice president and chief economist for Freddie Mac.  “Over the first nine months of this year, the average interest rate offered by lenders on 30-year fixed-rate loans was 5.1 percent, on 15-year fixed-rate loans was 4.7 percent, and on 5/1 hybrid ARMs was 4.9 percent according to the Primary Mortgage Market Survey®.  Because interest rates across fixed- and adjustable-rate products are similar and fixed-rate loans provide the benefit of a certain principal-and-interest payment, most borrowers have chosen fixed-rate loans.

“For borrowers who can swing the higher payments that come with shorter term mortgages, the interest savings really add up.  The average fixed-rate refinance loan in the first three quarters of 2009 had a principal balance of about $225,000 and an initial interest rate of 6.25 percent.  By choosing another 30-year fixed-rate mortgage, a borrower could lower their monthly payment by $160 per month and would accumulate $3,200 in equity through principal payments over the first year.  In contrast, a borrower who chose a 15-year fixed-rate mortgage would have an even lower new interest rate but their monthly payment would rise by $350 per month; however, at the end of the first year they would have paid down $10,650 of the principal balance, thus building up home-equity wealth more quickly.”