Throughout 2012 mortgage rates continued to hit new record lows and linger near those affordable rates allow many first-time buyers to make the investment for less and letting current homeowners refinance for either lower rates or shorter terms. Freddie Mac's Quarterly Product Transition Report revealed more than a quarter of those who refinanced opted to shorten their loan term.
According to the report, 27 percent of homeowners who refinanced chose to shorten the length of their loan, and 69 percent of borrowers kept their same term but benefited from lower rates. Only 4 percent increased the length of their term, which likely provided them with significantly lower monthly mortgage payments.
Additional information found that 95 percent of those refinancing selected a fixed-rate mortgage, and FRMs accounted for the majority of all refinancing even if the homeowner initially selected an adjustable-rate mortgage. Data from the government sponsored enterprise revealed that 83 percent of those who refinanced that had originally selected a hybrid ARM picked a FRM in the final quarter of 2012. Freddie Mac noted this was the highest share since the second quarter of 2010.
More homeowners also utilized the Home Affordable Refinance Program, though these borrowers were reportedly more likely to take out a long-term fixed-rate mortgage. More than 95 percent of those who refinanced under HARP selected an FRM while one-third of those who had an ARM initially but didn't refinance using the federal program stuck with the revolving payments offered by ARMs.
"Borrowers with smaller loan balances can shorten their loan term when refinancing with smaller dollar increases in their monthly payment than borrowers with large loan balances," said Frank Nothaft, chief economist and vice president of Freddie Mac. "That's an important reason why a larger percent of borrowers in a low housing cost market shorten their term when compared to borrowers in very high cost markets."
The report highlighted that in 2012, homeowners who resided in lower-priced cities were more willing or better able to shorten their term when compared to those living in higher-cost markets. Some cities such as Dallas reported higher amount of refinances where homeowners opted to shorten their term, while the high-priced real estate market of San Francisco reported only a 14 percent share of refinances for shorter terms.