Freddie Mac recently released the results of its fourth 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 as they closed out 2013. Borrowers who refinanced in 2013 will save on net approximately $21 billion in interest over the next 12 months. This release of the report also contains annual statistics on refinances for the 10 largest metropolitan areas and four Census regions of the U.S.
“Our latest refinance report shows the refinance boom continued to wind down as the pool of potential borrowers declined and as mortgage rates increased during the second half of 2013,” says Frank Nothaft, Freddie Mac vice president and chief economist. We are projecting the refinance share will be just 38 percent of all originations in 2014 as refinance falls off further and the emerging purchase market consumes a bigger piece of the pie.”
Of borrowers who refinanced during the fourth quarter of 2013, 39 percent shortened their loan term, up 2 percent from the previous quarter and the highest since 1992. Further, 42 percent of those who refinanced outside of HARP took out a shorter-term loan, while 35 percent of HARP borrowers shortened their term. Borrowers who kept the same term as the loan that they had paid off represented 56 percent and only 5 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 fourth quarter, an estimated $6.5 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 in the fourth quarter was about 1.5 percentage points — a savings of about 25 percent. On a $200,000 loan, that translates into saving about $3,000 in interest during the next 12 months. Homeowners who refinanced through HARP during the fourth quarter of 2013 benefited from an average rate reduction of 1.7 percentage points and will save an average of $3,300 in interest during the first 12 months, or about $275 every month.
About 83 percent 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. That’s just shy of the 88 percent peak during the second quarter of 2012.
More than 95 percent of refinancing borrowers chose a fixed-rate loan. Fixed-rate loans were preferred regardless of what the original loan product had been. For example, 94 percent of borrowers who had a hybrid ARM refinanced into a fixed-rate loan during the fourth quarter. In contrast, only 3 percent of borrowers who had a fixed-rate loan chose an ARM.
With mortgage rates remaining below 5 percent for most of the past four years, relatively few homeowners with loans taken in this period would have much incentive to refinance. Consequently, the median age the original loan was outstanding before refinance increased to 7.0 years during the fourth quarter, the most since the analysis began in 1985.
In metro areas where house price declines were more severe, the share of “cash-out” borrowers was smaller. Median house values on refinance loans have declined in nine of the ten areas, with the sharpest declines in Miami and Detroit. Of the ten, San Francisco was the metro area where median house prices increased. The share of borrowers who maintained the same loan amount or lowered their principal balance was above 80 percent in all ten large metropolitan areas.
For more information, visit www.FreddieMac.com.