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Refinances in Second Quarter Reduce Mortgage Payments by $3.4 Billion in Coming Year

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mortgage_lead_8_1RISMEDIA, August 1, 2009-In the second quarter of 2009, half of borrowers who refinanced their loan lowered their annual mortgage interest rate by at least 20% according to Freddie Mac’s quarterly Refinance Report. The new interest rate was about 1.25 percentage points below the old rate. In aggregate, the interest-rate reduction adds up to about $3.4 billion in payment savings for these homeowners over the next year.

“Interest rates for fixed-rate conventional conforming mortgages hit 50-year lows during the second quarter of 2009. In Freddie Mac’s Primary Mortgage Market Survey® rates for 30-year fixed rate mortgages averaged just 5.03% over the quarter with 0.7 points, and twice hit an all-time weekly average low of 4.78% in April,” noted Frank Nothaft, Freddie Mac vice president and chief economist. “A big part of the benefit of refinancing is the lower monthly payment that borrowers enjoy-the payment savings from ‘rate-and-term’ refinancing done during the quarter is about $160 a month on a $200,000 loan. But these borrowers also accumulate principal faster than they would have with a higher-rate loan even after taking into account the longer terms of the new loans. In aggregate, second-quarter refinancers will have about $200 million additional principal paydown after a year than they would have under their old loans.

“Fixed mortgage rates are still very low, although they have climbed up a bit from their April lows. We are anticipating more than one-half of originations to be for refinancing throughout the rest of the year as long as rates stay near their current levels of 5.25 percent.”

The report also indicates that 62% of prime borrowers who refinanced a conventional, second-lien mortgage either kept the same principal balance or reduced it, up from a revised 57% in the first quarter. The share of refinance loans resulting in new loan amounts that were at least 5% higher than the paid-off second-lien mortgage balances fell to a six-year low of 38% in the second quarter; the first-quarter cash-out share was revised down to 43%.

“In the second quarter, about $25 billion in home equity was cashed out by homeowners when they refinanced their conventional prime-credit home mortgage. This is up a little less than $5 billion from the first quarter volume, but, importantly, the rise reflects the jump in the number of loans refinanced rather than an increase in the amount borrowers are cashing out per loan,” said Amy Crews Cutts, Freddie Mac deputy chief economist. “Credit standards are quite strict today for cash-out refis, and borrowers need a significant equity cushion to contemplate equity extraction. That’s why cash-out volumes are 35 percent lower now than a year ago even though interest rates are so low.”

For more information, visit www.freddiemac.com.

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