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Borrowers Attracted by 50-Year Interest-Rate Lows for Fixed-Rate Mortgages

August 20, 2009

Freddie Mac reported that in the second quarter of 2009, refinancing borrowers overwhelmingly chose fixed-rate loans, regardless of whether their original loan was an adjustable-rate mortgage (ARM) or fixed.

According to Freddie Mac, 99 percent of prime borrowers who originally had a conforming ARM selected a new conforming fixed-rate mortgage when they refinanced, up slightly from a revised share of 98 percent in the first quarter.

While 30-year fixed-rate mortgages tended to be the preferred new product, 15-year fixed-rate mortgages gained favor among refinancers, with roughly a 2 percentage point increase in the proportion choosing this product for original ARM borrowers and nearly a 4 percentage point increase among original fixed-rate borrowers.

“When interest rates hit very low levels for fixed-rate mortgages, borrowers often take this opportunity to lower their interest rate and shorten their loan term,” said Frank Nothaft, vice president and chief economist for Freddie Mac. “In April mortgage rates reached new lows for both 15-year and 30-year fixed-rate loans in Freddie Mac’s Primary Mortgage Market Survey. Many borrowers could shorten their loan terms without having a big increase in their mortgage payments, thereby building equity faster, reducing the total interest paid over the life of the loan, and ensuring their loan is largely paid off by their retirement."

Nothaft said both refinancing borrowers and families buying homes are shying away from ARMs in the current environment. During the second quarter, 5/1 hybrid ARMs carried an average rate of 4.9 percent while 30-year fixed mortgage rates were only at 5.0 percent on average in our survey.

“The small benefit from the lower rate is not enticing enough to cover the risk that rates will rise in the future from these historic lows,” he said.

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