More Homeowners Opt for Fixed-Rate Mortgage Products

Fixed-rate mortgages have become the dominant choice among borrowers looking to refinance their home loans, with more and more applicants gravitating toward shorter loan terms.
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""Freddie Mac"":http://www.freddiemac.com released the results of its ""quarterly study"":http://www.freddiemac.com/news/archives/corporate/2010/20101115_product_transition.html on loan transition trends Monday. The GSE's analysts found that in the third quarter of 2010, refinancing borrowers overwhelmingly chose fixed-rate loans, regardless of whether their original loan was an adjustable-rate mortgage (ARM) or a fixed-rate.

Overall, fixed-rate loans accounted for more than 95 percent of refinances last quarter, according to the GSE's market data.

Frank Nothaft, Freddie Mac's VP and chief economist, noted that fixed mortgage rates dropped steadily throughout the third quarter, with 30-year fixed rates falling to levels not seen since the early 1950s.

""We ended the second quarter excited that borrowers could lock in a rate of 4.75 percent for 30 years, and we ended the third quarter with rates at just a touch over 4.25

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percent,"" Nothaft said. ""It's no wonder borrowers are attracted to fixed-rate loans.""

While 30-year fixed-rate mortgages are still the most preferred product chosen for the new, refinance loan, Freddie Mac says borrowers who previously held shorter-term fixed-rate mortgages showed a stronger preference for staying with a 15-year or 20-year fixed-rate loan than they have in recent quarters.

""The share of borrowers shortening their amortization terms remains high,"" Nothaft said. ""There is always a discount for shorter terms but the payments are often about 50 percent higher than a 30-year amortizing payment and thus are unaffordable to many homeowners. What we're seeing now is that the level of the 15-year payment is becoming more affordable to more borrowers.""

A ""separate study"":http://www.freddiemac.com/news/archives/rates/2010/3qupb10.html released by Freddie Mac last month found that 33 percent of homeowners who refinanced their first-lien home mortgage during the third quarter lowered their principal balance by paying-in additional money at the closing table â€" a practice referred to as a cash-in refinance.

Last quarter's was the second highest ""cash-in"" share since Freddie Mac began keeping records on refinancing patterns in 1985. By comparison, 23 percent of homeowners refinancing during the second quarter of this year paid additional cash-in to lower the principal of the new loan.

""When rates fall to new lows we typically see more ‘rate and term' refinancers, who are looking only to reduce their interest payments,"" Nothaft commented. ""But now we're also seeing a very large share of borrowers reduce their mortgage debt when they refinance. Consumer debt across the board is down since the start of the recession.""