Shorter loan terms popular for refinance
Low mortgage rates offer several options for homeowners with enough equity to refinance. While the most popular option for homeowners is to reduce their monthly mortgage payment with a home refinance, some borrowers choose instead to shorten their loan term to pay off their entire loan more quickly.
According to Freddie Mac, 95 percent of homeowners who refinanced in the third quarter of 2011 chose to refinance into a fixed-rate mortgage and 40 percent of those who refinanced from a 30-year fixed-rate loan chose a 15 or 20-year fixed-rate loan. This is the highest percentage of borrowers choosing to shorten their loan term since the second quarter of 2003.
“Compared to a 30-year fixed-rate mortgage, the interest rate on 15-year fixed was about 0.8 percentage points lower during the third quarter,” said Frank Nothaft, Freddie Mac vice president and chief economist. “For borrowers motivated to refinance by low fixed-rates, they could obtain even lower rates by shortening their term. The initial interest rate on a 5/1 hybrid ARM was about 1.2 percentage points lower than on a 30-year fixed-rate loan. For borrowers who plan to remain in their current home for only a few years, the hybrid ARM allows for even a greater interest-rate savings.”
Mortgage refinance applications slow
In spite of the recognizable benefits of a mortgage refinance, the Mortgage Bankers Association (MBA) Refinance Index for the week ending November 11, 2011 showed that applications for refinancing decreased 12.2 percent over the previous week.
According to HSH.com, mortgage rates dropped slightly last week to an average of 4.34 percent for a 30-year fixed-rate home loan and average of 3.65 percent for a 15-year fixed-rate home loan. The initial rate for a 5/1 hybrid ARM averaged 3.09 percent.
The decline in refinance applications last week may be tied to the expansion of the Home Affordable Refinance Program (HARP), which is expected to allow more homeowners with little or no equity to refinance. Applications for that program are anticipated to be available beginning December 1.
