About 27% of borrowers that refinanced an existing mortgage in the final quarter of 2012 chose to shorten their loan term, while 69% of borrowers kept the same term as the loan that they paid off, according to a report from Freddie Mac.
Additionally, refinancing borrowers preferred fixed-rate loans, accounting for 95% of refi applicants. Fixed-rate loans were preferred regardless of what the original loan product was, the report said.
For instance, 83% of borrowers who had a hybrid adjustable-rate mortgage (ARM) chose a fixed-rate loan during 4Q12, the highest share since the second quarter of 2010.
"Fixed mortgage rates averaged 3.36% for 30-year loans and 2.67% for 15-year mortgages during the fourth quarter in Freddie Mac's Primary Mortgage Market Survey, the lowest quarterly averages recorded in our survey," said Freddie Mac Vice President Frank Nothaft.
He added, "For borrowers motivated to refinance by low fixed-rates, they could obtain even lower rates by shortening their term. Further, a shorter-term, fully amortizing loan reduces the loan balance faster and builds home equity sooner."
Borrowers who refinanced under the Home Affordable Refinance Program (HARP) were more likely to take out a long-term, fixed-rate mortgage, the report stated.
For example, more than 95% of HARP borrowers who were refinancing out of an ARM chose a fixed-rate mortgage. In contrast, more than one-third of borrowers that had an ARM, but did not refinance through HARP, opted for another ARM.
Based on data for the twelve large metropolitan areas in 2010, borrowers who lived in lower-priced metro areas were generally more likely to shorten their term compared to borrowers living in high-cost housing markets, the report said.
Nationally, 29% of borrowers shortened their loan term when refinancing. Specifically, 43% of borrowers in Dallas shortened their term, compared to 14% of borrowers in San Francisco, Freddie Mac said.
"Borrowers with smaller loan balances can shorten their loan term when refinancing with smaller dollar increases in their monthly payment than borrowers with large loan balances," Nothaft said.
He concluded, "That's an important reason why a larger percent of borrowers in a low housing cost market shorten their term when compared to borrowers in very high cost markets."