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Borrowers Overwhelmingly Pick Fixed-Rate Refinancings in Q4

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Record-low interest rates in the fourth quarter of 2009 -- thanks in large part to government intervention in both the primary and secondary mortgage markets -- drove refinancing borrowers towards fixed-rate loans almost exclusively. Freddie Mac (FRE) reported Monday that 95%of refinance loans during the last quarter of last year were of the fixed-rate variety. And while traditional 30-year fixed-rate mortgages are still the most preferred product among refinancings, 15-year fixed-rate mortgages gained favor among borrowers who previously held 30-year fixed-rate mortgages, balloon mortgages and adjustable-rate mortgages (ARMs), the GSE said in a statement. “The lowest fixed-rate interest rates in more than a generation, coupled with the comfort that a constant monthly principal and interest payment provides the homeowner, are important drivers in fixed-rate product choice," said Frank Nothaft, vice president and chief economist for Freddie Mac. “While homeowners are choosing the safety of fixed-rate mortgages in large numbers, at the same time many borrowers are now looking at paying down their mortgage balances faster by choosing a shorter mortgage term of 15 or 20 years instead of 30." Borrowers also chose to pay down principal during refinancing at a record clip in the fourth quarter. Freddie reported at the end of January that 33% of borrowers paid down their original principal by $1,000 or more during the process of refinancing their mortgage -- the highest such "cash in" refinancing volume in the history of the GSE's survey. "When you can only earn a very low interest rate on your CD or money market accounts, and returns on other investments remain extremely uncertain, it can make sense to pay yourself 4.5 or 5 percent by eliminating some mortgage debt whether by making extra payments or going for a shorter loan term," Nothaft said.

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