MCLEAN, VA--(Marketwired - Nov 12, 2013) - Freddie Mac (OTCQB: FMCC) today released the results of its third quarter 2013 quarterly refinance analysis, showing that borrowers are continuing to take advantage of near record low mortgage rates to lower their monthly payments, shorten their loan terms and overwhelmingly choosing the safety of long-term fixed-rate mortgages. Borrowers who refinanced in the third quarter of 2013 will save on net approximately $6 billion in interest over the next 12 months.
- Of borrowers who refinanced during the third quarter of 2013, 37 percent shortened their loan term, up 5 percent from the previous quarter and the highest since 1992. Further, 40 percent of those who refinanced outside of HARP took out a shorter-term loan, while 32 percent of HARP borrowers shortened their term. Borrowers who kept the same term as the loan that they had paid off represented 59 percent and only 4 percent chose to lengthen their loan term.
- The net dollars of home equity converted to cash as part of a refinance remained low compared to historical volumes. In the third quarter, an estimated $6.4 billion in net home equity was cashed out during a refinance of conventional prime-credit home mortgages. The peak in cash-out refinance volume was $84 billion during the second quarter of 2006. Adjusted for inflation, annual cash-out volumes during 2010 through 2013 have been the smallest since 1997.
- The average interest rate reduction was about 1.8 percentage points -- a savings of about 30 percent. On a $200,000 loan, that translates into saving about $3,500 in interest during the next 12 months. For all borrowers that refinanced during the third quarter, the estimated interest savings over the next 12 months will be about $6 billion. Homeowners who refinanced through HARP during the third quarter of 2013 benefited from an average rate reduction of 1.9 percentage points and will save an average of $3,850 in interest during the first 12 months, or about $320 every month.
- About 85 percent of those who refinanced their first-lien home mortgage maintained about the same loan amount or lowered their principal balance by paying in additional money at the closing table. That's just shy of the 88 percent peak during the second quarter of 2012.
- More than 95 percent of refinancing borrowers chose a fixed-rate loan. Fixed-rate loans were preferred regardless of what the original loan product had been. For example, 86 percent of borrowers who had a hybrid ARM refinanced into a fixed-rate loan during the second quarter. In contrast, only 3 percent of borrowers who had a fixed-rate loan chose an ARM.
- With mortgage rates remaining below 5 percent for most of the past four years, relatively few homeowners with loans taken in this period would have much incentive to refinance. Consequently, the median age the original loan was outstanding before refinance increased to 6.7 years during the third quarter, the most since the analysis began in 1985.
Attributed to Frank Nothaft, Freddie Mac vice president and chief economist:
"With mortgage rates still near their historic lows, 37 percent of refinancing borrowers chose to shorten their loan term. Mortgage rates on 15-year fixed-rate loans averaged nearly a full percentage point below 30-year loans during the third quarter, providing a financial incentive for homeowners to term shorten. HARP refinancers have an additional incentive to shorten as some origination fees are waived. By obtaining lower interest rates, borrowers will save approximately $6 billion in interest over the next 12 months, which they can put towards savings, paying down debt or supporting additional expenditures. Further, the estimated $6.4 billion in 'cash-out' activity will further augment borrowers' investment and consumption spending."
About the Quarterly Refinance Report
These estimates come from a sample of properties on which Freddie Mac has funded two successive conventional, first-mortgage loans, and the latest loan is for refinance rather than for purchase. The analysis does not track the use of funds made available from these refinances. The analysis also does not track loans paid off in entirety, with no new loan placed. Some loan products, such as 1-year ARMs and balloons, are based on a small number of transactions. During the third quarter of 2013, the refinance share of applications averaged 64 percent in Freddie Mac's monthly refinance survey, and the ARM share of applications was 7 percent in Freddie Mac's monthly ARM survey, which includes purchase-money as well as refinance applications.
With the report for the first quarter of 2013, the calculation of the principal balance at payoff of the previous loan has been modified. Previously, the payoff balance was calculated as the amount due based on the loan's amortization schedule, and "cash-in" was defined as a new loan amount that was less than the scheduled amortization amount. Data for 1994 to current have been recalculated using the actual payoff amount of the old loan, with an allowance for rounding down the principal at refinance; thus, from 1994 to present, "cash-in" is defined as a new loan amount that is at least $1,000 less than the payoff principal balance of the old loan. Data are presented under both methods for 1994 for comparison purposes.
Freddie Mac was established by Congress in 1970 to provide liquidity, stability and affordability to the nation's residential mortgage markets. Freddie Mac supports communities across the nation by providing mortgage capital to lenders. Today Freddie Mac is making home possible for one in four home borrowers and is one of the largest sources of financing for multifamily housing. For more information please visit www.FreddieMac.com and Twitter: @FreddieMac.