Borrowers took advantage of better than expected mortgage rates during the first quarter with the intention of lowering their monthly mortgage payment and shortening their loan term, shows Freddie Mac’s recently released first quarter refinance analysis.
Approximately 27 percent of borrowers increased their loan amount when refinancing, either by cashing out equity or consolidating loans, versus 29 percent from last quarter, 17 percent from the same time last year and well below the peak of 89 percent in 2006.
“Many homeowners took advantage of low mortgage rates by refinancing in the first quarter of 2015,” says Len Kiefer, Freddie Mac deputy chief economist. “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. Refinance borrowers are primarily looking to reduce payments and pay down principal faster. 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.”
The net dollars of home equity converted to cash as part of a refinance remained low compared to historical volumes. In the first quarter, an estimated $7.7 billio 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. The peak in cash-out refinance volume was $84 billion during the second quarter of 2006, with an annual volume of $320.6 billion.
Of borrowers who refinanced during the first quarter of 2015, 34 percent shortened their loan term, down slightly from the previous quarter. Of eligible borrowers who used the Home Affordable Refinance Program (HARP), 36 percent 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 percent. On a $200,000 loan, that translates into saving about $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.
About 73 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, about the same as last quarter.
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, 76 percent of borrowers who had a hybrid ARM refinanced into a fixed-rate loan during the first quarter. In contrast, only 3 percent 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 percent 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.