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Fixed-Rate Mortgages Dominant Among Refinancing Homeowners

May 13, 2010

In the first 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, according to Freddie Mac's quarterly Product Transition Report.

While 30-year fixed-rate mortgages are still the most preferred product chosen for the new loan, 15-year fixed-rate mortgages gained favor among refinancers who previously held 30-year fixed-rate mortgages, balloon mortgages and ARMs. Overall, fixed-rate loans accounted for more than 95 percent of refinance loans during the quarter.

"Average interest rates on 30-year and 15-year fixed-rate mortgage loans remained extraordinarily low during the first quarter, averaging 5.00 percent and 4.38 percent respectively in Freddie Mac's Primary Mortgage Market Survey®," said Frank Nothaft, vice president and chief economist for Freddie Mac. "The average initial rate on a 5/1 hybrid ARM was 4.20 percent during the first three months of 2010. With fixed-rate interest rates near a generational low and initial interest rates on hybrid ARMs close to fixed-rate levels, large numbers of homeowners have chosen fixed-rate loans for refinance.

"While homeowners are choosing the comfort that comes with constant monthly principal and interest payments on fixed-rate mortgages, at the same time many borrowers are now looking at paying down their mortgage balances faster by choosing a shorter mortgage term of 15 or 20 years instead of 30 years. During the first quarter, 25 percent of borrowers who had 30-year fixed-rate loans refinanced into a 15- or 20-year fixed-rate loan, the largest percentage shortening their term since the third quarter of 2004, when about 30 percent of borrowers who had a 30-year fixed-rate loan opted for a shorter-term fixed-rate loan or a balloon note."

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.



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