Refinancing Borrowers Choose Safety of Fixed-Rate Mortgages

Mortgage financier ""Freddie Mac"":http://www.freddiemac.com announced today that in the third quarter of 2008, 94 percent of prime borrowers who originally had a 1-year conforming adjustable-rate mortgage (ARM) chose a new conforming fixed-rate mortgage when they refinanced. Eighty-two percent of prime borrowers that initially had a conforming hybrid ARM also refinanced into a conforming fixed-rate loan. The comparable numbers in the second quarter were 97 percent and 86 percent, respectively. In addition, Freddie said, more than 95 percent of borrowers who had a fixed-rate loan refinanced into another long-term fixed-rate loan last quarter.
""The elevated interest-rate volatility that has been a feature of the capital markets in recent months has discouraged borrowers from seeking adjustable-rate mortgages unless they have at least several years worth of an initial fixed-rate period,"" said Frank Nothaft, VP and chief economist for Freddie Mac. ""When borrowers see so much change in interest rates it highlights the payment risk that they may face from future rate increases.
""In the third quarter alone, weekly average rates on 1-year ARMs ranged from a low of 5.0 percent to a high of 5.5 percent; with this contract the borrower faces the uncertainty of not knowing what the interest rate will be in one year,"" Nothaft continued. ""In contrast, while rates on 5/1 hybrid ARMs were slightly higher, ranging from 5.7 to 6.4 percent in the third quarter, the borrower locks in that rate for five years.""
Freddie Mac's Refinance Product Transition Report indicates that while 18 percent of borrowers who initially had a hybrid ARM refinanced back into that product, only 4 percent of borrowers who originally had a 30-year fixed-rate loan switched to an ARM loan, and all of those borrowers chose a hybrid loan product. These estimates come from a sample of properties on which Freddie Mac has funded at least two successive loans and the latest loan is for refinance rather than for home purchase.