by Broderick Perkins
(5/16/2012) Erate Exclusive - More than 95 percent of refinancing homeowners chose fixed rate mortgages (FRMs) over adjustable rate mortgages (ARMs) and 31 percent reduced their old 30-year loan by replacing it with a 20- or 15-year model, according to Freddie Mac's Quarterly Product Transition Report for the first quarter 2012.
A full 100 percent of borrowers with a one-year ARM, decided not to gamble on low rates for the coming year and bailed out for a 15-year FRM (60 percent), a 20-year FRM (13 percent) or the old stand-by, a 30-year FRM (27 percent.)
However, among those with ARM-hybrids, which can give borrowers a few years of wagering room, 32 percent decided to stick with the loan as 57 percent switched to a 30-year FRM, 4 percent went with the 20-year deal and 8 percent chose a 15-year FRM.
Hybrids are fixed at a lower-than-FRM rate for a few years, say three, five or seven, and than transform into an ARM. With a hybrid, even if rates go up during the fixed term, borrowers have some time to adjust their finances or perhaps refinance again at the end of the fixed rate term.
The total 68 percent of homeowners who transitioned from a hybrid to a fixed-rate represented the highest share since the first quarter of last year, according to Freddie Mac.
"Fixed mortgage rates averaged 3.92 percent for 30-year loans and 3.19 percent for 15-year product during the first quarter in Freddie Mac's Primary Mortgage Market Survey, well below long-term averages. The Bureau of Economic Analysis has estimated the average coupon on single-family loans was about 5.1 percent during the first quarter of 2012. It's no wonder we continue to see strong refinance activity into fixed-rate loans," said Frank Nothaft, Freddie Mac's vice president and chief economist.
Erate.com on May 15 reported 30-year rates as low as 3.56 percent - for those with pristine credit and all other financial docs in a perfect row. Fifteen-year FRM rates were as low as 2.68 percent.
Rates have been falling for a few weeks as elections in France and Greece added to Euro Zone worries and declines in U.S. stock prices sent investors scurrying for Treasury securities. Mortgage rates are tied to Treasury yields.
"Compared to a 30-year fixed-rate mortgage, the interest rate on a 15-year fixed was about three-quarters of a percentage point lower during the first quarter. For borrowers motivated to refinance by low fixed-rates, they could obtain even lower rates by shortening their term," said Nothaft.
Further, under the enhanced Home Affordable Refinance Program - HARP - announced by FHFA, certain risk-based fees are waived for HARP borrowers who refinance into shorter-term loans," he added.
Among refinancing borrowers already holding 30-year FRMs, 64 percent stayed the course, 14 percent went to a 20-year FRM, 21 percent chose a 15-year FRM and 1 percent decided to let it roll on an ARM-hybrid.
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