Freddie Mac recently released the results of its third quarter 2013 quarterly refinance analysis, showing that borrowers are continuing to take advantage of near record low mortgage rates to lower their monthly payments, shorten their loan terms and overwhelmingly choosing the safety of long-term fixed-rate mortgages. Borrowers who refinanced in the third quarter of 2013 will save on net approximately $6 billion in interest over the next 12 months.
“With mortgage rates still near their historic lows, 37 percent of refinancing borrowers chose to shorten their loan term,” says Frank Nothaft, Freddie Mac vice president and chief economist. “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. HARP refinancers have an additional incentive to shorten as some origination fees are waived.”
• Of borrowers who refinanced during the third quarter of 2013, 37 percent shortened their loan term, up 5 percent from the previous quarter and the highest since 1992. Further, 40 percent of those who refinanced outside of HARP took out a shorter-term loan, while 32 percent of HARP borrowers shortened their term. Borrowers who kept the same term as the loan that they had paid off represented 59 percent and only 4 percent chose to lengthen their loan term.
• The net dollars of home equity converted to cash as part of a refinance remained low compared to historical volumes. In the third quarter, an estimated $6.4 billion in net home equity was cashed out during a refinance of conventional prime-credit home mortgages. The peak in cash-out refinance volume was $84 billion during the second quarter of 2006. Adjusted for inflation, annual cash-out volumes during 2010 through 2013 have been the smallest since 1997.
• The average interest rate reduction was about 1.8 percentage points — a savings of about 30 percent. On a $200,000 loan, that translates into saving about $3,500 in interest during the next 12 months. For all borrowers that refinanced during the third quarter, the estimated interest savings over the next 12 months will be about $6 billion. Homeowners who refinanced through HARP during the third quarter of 2013 benefited from an average rate reduction of 1.9 percentage points and will save an average of $3,850 in interest during the first 12 months, or about $320 every month.
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