Homeowners Continue Shorten Loan Terms, Saving Billions


Homeowners who
refinanced in the first quarter of 2013 maintained the approximate
cash balance of the loan they were refinancing but in more than one
quarter of the cases, they shortened the term of their new loan.

Freddie Mac’s quarterly
refinance analysis
showed that borrowers in the first quarter, taking
advantage of record low interest rates, will save an aggregate of
approximately $7 billion in interest over the next 12 months. These
borrowers, by an overwhelming margin, opted to insure they will keep
those rates as 95 percent chose fixed rate loans.

The cash-out refinancing
which came to a screeching halt with falling house prices and
stricter lending standards shows no sign of resurgence. The net
dollars of home equity converted to cash through refinancing remained
at a low consumer-price adjusted volume of $8.1 billion, about the
same as in the fourth quarter of 2012. During the second quarter of
2006, at the peak of cash-out activity, borrowers took $84 billion in
cash from their homes. Only about 15 percent of refinancing
borrowers took cash out in the most recent period while about three
percent lowered the principal balance of their mortgage by paying

Twenty-eight percent of borrowers who
refinanced during the quarter shortened their loans terms while 68
percent kept the same term and 3 percent opted for a longer term

Loans through the Home Affordable Refinance Program (HARP) made up
just over 20 percent of the refinance loans purchased during the
first quarter by Freddie Mac and Fannie Mae. Property-value change,
loan age, and rate reduction differed between refinancings under HARP
and other refinances.

HARP loans evidenced a median depreciation in property value of 28
percent while properties refinanced through non-HARP programs had
vary little change in value between the dates the old loans were put
in place and the new loan was closed. Loans refinanced through HARP
had a median age of about six years (to be eligible for HARP, the
prior loan had to be originated before June 1, 2009), and the median
for other loans was 4.1 years. HARP borrowers with a 30-year
fixed-rate refinance (no product change) had an average interest-rate
reduction of 2.1 percentage points other borrowers, in the same
circumstances, had an average interest rate decline of 1.6 percentage

Frank Nothaft, Freddie Mac vice president and
chief economist said, “Borrowers continue to strengthen their
fiscal house by taking advantage of near record low mortgage rates.
In total, borrowers who refinanced in the first quarter of this year
will save approximately $7 billion in interest payments over the next
12 months, which they can put towards savings, paying down debt or to
support additional expenditures. Further, the estimated $8 billion in
‘cash-out’ activity will further augment borrowers’ investment and
consumption spending.”

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