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More refinancing homeowners choose shorter loan terms

Majority still opt into fixed-rate mortgages: Freddie Mac

Of all the borrowers refinancing Freddie Mac-linked loans in the third quarter, 37% moved into shorter loan terms, up 5% from the previous quarter and the highest level recorded since 1992, the housing enterprise claims in a report.

The takeaway from the report: two out of five borrowers managed to cut their loan terms during the refi process in 3Q.

Freddie released its third-quarter 2013 quarterly refinance update on Tuesday, which included those findings.

The study noted that interest rates remain low enough to attract borrowers looking to refinance even as rates edge up from early 2013 levels. What was telling was how many homeowners wanted shorter-loan terms – regardless of whether they took out a Home Affordable Refinancing Program mortgage or went through some other channel.  

While 32% of HARP borrowers refinanced into shorter-term loans, 40% of those refinancing outside of HARP also took on mortgages with faster pay-off schedules, Freddie said.  

All of the borrowers who refinanced in the third-quarter will end up saving $6 billion in total interest over the next year, with the average interest rate reduction hitting 1.8 percentage points, or roughly 30% in savings.

This equates to a borrower saving $3,500 in interest payments over the next year on a $200,000 loan, according to Freddie. On the other hand, borrowers who went through HARP are likely to save a bit more, with Freddie estimating an interest savings of $3,850 during the first 12 months of the refi – or $320 per month.

Borrowers who kept the same loan term as the mortgage they paid off represented 59% of the Freddie-refi market, while only 4% chose to lengthen their loan terms.

Freddie discovered that 85% of refinancing borrowers with first-liens going through the process kept the same principal amount or lowered it by putting more money on the table at closing. That is down from 88% in the second quarter of 2012.

The majority of the borrowers – 95% to be exact – chose a fixed-rate mortgage even if they originally had a hybrid adjustable-rate home loan.

Rates may be higher than they were earlier in the year, but there's still a price incentive to move now, Frank Nothaft, chief economist for Freddie Mac said.

"Mortgage rates on 15-year fixed-rate loans averaged nearly a full percentage point below 30-year loans during the third quarter, providing a financial incentive for homeowners to term shorten," he explained.

"HARP refinancers have an additional incentive to shorten as some origination fees are waived. By obtaining lower interest rates, borrowers will save approximately $6 billion in interest over the next 12 months, which they can put towards savings, paying down debt or supporting additional expenditures. Further, the estimated $6.4 billion in 'cash-out' activity will further augment borrowers' investment and consumption spending."

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