A continually low-interest rate climate led to borrowers refinancing at an increased rate in the first quarter, according to a new report from Freddie Mac.
Freddie Mac’s quarterly refinance analysis for the first quarter of 2015 found that 63% of the single-family loans originated in the first quarter were refinances, compared to approximately 52% for the full year 2014, according to Freddie’s data.
Additionally, Freddie Mac reported that approximately 27% of borrowers increased their loan amount when refinancing in the first quarter, either by cashing out equity or consolidating loans, compared to 29% in the fourth quarter of 2014.
For comparison, in the first quarter of 2014, 17% of borrowers increased their loan amount, but the first quarter of 2015 is still well below the peak of 89% in 2006.
"Many homeowners took advantage of low mortgage rates by refinancing in the first quarter of 2015. Relatively younger loans refinanced as the median age of a refinanced loan declined to 5.6 years, down from 6.8 years in the prior quarter,” Len Kiefer, Freddie Mac deputy chief economist, said.
“Refinance borrowers are primarily looking to reduce payments and pay down principal faster,” Kiefer continued. “We estimate that borrowers who refinanced in the first quarter will save on net more than $1.4 billion in interest payments over the first 12 months of their new loan. Nearly a third of borrowers who refinanced shortened their loan term."
According to the Freddie Mac report, the net dollars of home equity converted to cash as part of a refinance remained low when compared to historical volumes.
In the first quarter, an estimated $7.7 billion in net home equity was cashed out during a refinance of conventional prime-credit home mortgages, down from the revised $7.6 billion the previous quarter in 2014 dollars, Freddie Mac said. The peak in cash-out refinance volume was $84 billion during the second quarter of 2006, with an annual volume of $320.6 billion.
Freddie Mac’s report also showed that of borrowers who refinanced during the first quarter of 2015, 34% shortened their loan term, down slightly from the previous quarter. Of eligible borrowers who used the Home Affordable Refinance Program, 36% shortened their term. During the past four quarters, more than one-third of HARP borrowers shortened their term.
The average interest rate reduction in the first quarter was about 1.2 percentage points, a reduction of about 24%, Freddie Mac said. On a $200,000 loan, that equals savings of roughly $2,500 in interest during the next 12 months.
Homeowners who refinanced through HARP benefited from an average rate reduction of 1.8 percentage points and will save an average of $3,500 in interest during the first 12 months or about $290 monthly.
Additionally, roughly 73% of those who refinanced their first-lien home mortgage maintained about the same loan amount or lowered their principal balance by paying in additional money at the closing table, about the same as last quarter, Freddie Mac said in the report.
Freddie’s report also stated that more than 95% of refinancing borrowers chose a fixed-rate loan. Fixed-rate loans were preferred regardless of what the original loan product had been, Freddie’s report stated. For example, 76% of borrowers who had a hybrid ARM refinanced into a fixed-rate loan during the first quarter. In contrast, only 3% of borrowers who had a fixed-rate loan chose an ARM.
For all other (non-HARP) refinances during the fourth quarter, the median property value was up 5% between the dates of placement of the old loan and the new refinance loan. The prior loan had a median age of 5.6 years down from 6.8 years in the fourth quarter of 2014, Freddie said.