Nearly all Freddie Mac-backed mortgage borrowers who refinanced their loans in previous quarters have chosen to shift from adjustable-rate to fixed-rate mortgages or to remain users of fixed-rate loans.
In the third quarter, more than 95 percent of borrowers of Freddie-backed loans who refinanced mortgages moved into fixed-rate. Borrowers have been seeing the leverages they can get if they refinance their homes now, at a time when mortgage interest rates have dropped to their lowest levels in about 60 years. From July to September, the rate for 30-year fixed-rate loans hovered at 4.25 percent and in the second week of this month, it fell further to 4.17 percent.
Because of the record low rates, a number of borrowers have also been shortening their terms from 30-year terms to 15-year and 20-year terms. Although the monthly payments for 15-year terms are about 50-percent higher than those for 30-year terms, the payments have become affordable because of the low rates and the significant discounts given to loans with shorter terms.
According to Freddie Mac, the percentage of borrowers refinancing into shorter terms have shot up to its highest point in six years. Additionally, the percentage of homeowners who have refinanced from a 30-year fixed-rate loan to a 15-year or 20-year fixed-rate loan has risen to 30 percent, pushing up the number of short-term home loans into its highest level in six years. Freddie traced the trend by studying residential properties on which it had financed both the loan purchase and the loan refinancing.
It’s not only Freddie experiencing surges in loan refinancing, mortgage lenders have been seeing more loan refinancings than purchase loans, with the share of refinancing shooting up to 85 percent of all their new mortgages.
Based on statements from experienced mortgage brokers and lenders, loan refinancing makes financial sense for any borrower who’s holding a mortgage with an interest rate of 5.25 percent. Even with loans in the upper 4-percent range, refinancing can still produce monthly savings.
A borrower who has been paying $1,150 a month for a 5.75-percent loan can reduce his monthly payment to $1,035 by refinancing to a 4.75-percent loan. With a monthly saving of $115 a month or a yearly saving of $1,380, one can accumulate a substantial amount that can be used to cut down the principal further and pay off the loan more quickly.
Freddie and its fellow government-sponsored enterprise Fannie Mae have been offering loan refinancing to certain delinquent borrowers under the Home Affordable Refinance Program. Recently, the Federal Housing Administration launched a loan refinancing program for homeowners who are current with their payments, but who desire to refinance their loans to take advantage of the record low mortgage rates.