Freddie Mac: The return of the refinance market

Borrowers save $5 billion in interest payments in 2015

Refinance applications revived toward the end of 2014 and into the new year as mortgage rates dropped back down to levels not seen since 2013.

Although Freddie Mac forecasts the refinance share to be about 40% in 2015, compared to 63% in 2013, this time around, house prices have continued to rise, increasing by about 4.5% on a year-over-year basis in the fourth quarter of 2014.

The latest CoreLogic (CLGX) report showed home prices, including distressed sales, increasing 5% in December 2014 compared to last year.

“Lower mortgage rates, coupled with greater house prices appreciation last year, also brought about a larger share of borrowers cashing out home equity at the time of refinance,” said Len Kiefer, Freddie Mac deputy chief economist. “However, while the percentage is up, the total dollar amount declined by nearly $1 billion from the third quarter of 2014, and nearly $4.6 billion from the fourth quarter 2013."

For the first time since 2009, the median appreciation of a refinanced property has turned positive, meaning that over half of all borrowers who refinanced saw their home equity increase since taking out their original loan.

Borrowers who refinanced will save on net approximately $5 billion in interest over the first 12 months of their new loan, down from $20 billion in 2013.  

Borrowers cut their mortgage rate by almost one-fourth, or an average interest-rate reduction of 1.3 percentage points, through refinancing, during the fourth quarter.

In addition, 34% of homeowners refinanced into a shorter-term fully amortizing loan, to pay down principal and build home equity faster than on their previous loan.

The most recent mortgage applications report from the Mortgage Bankers Association showed applications increasing 1.3% from the previous week, with the refinance share of mortgage activity coming in at 71% of total applications.

The latest Freddie Mac Primary Mortgage Market Survey recorded the 30-year, fixed-rate mortgage averaging 3.66% for the week ended Jan. 29, up from last week’s 3.63%, but still down from 4.32% last year.

Since mortgage rates are still down, Freddie Mac predicts this uptick in mortgage refinances to continue into the first quarter of 2015. 

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