Refinancing Borrowers Going with Shorter Loan Terms

August 11, 2010 No Comments »


More homeowners are opting for shorter loan terms when refinancing, according to mortgage financier Freddie Mac.

During the second quarter, 30 percent of borrowers who originally had 30-year fixed-rate mortgages went with 15-year or 20-year fixed-rate loans, the highest level in six years.

“If the borrower had a 30-year fixed rate loan at a 6.5 percent interest rate and a $200,000 principal balance, they could refinance and cut their payment by about $250 a month with a new 30-year fixed-rate loan or for about the same monthly payment as their old loan they could save some $70,000 in interest over the life of the loan with the shorter 20-year term loan,” said Frank Nothaft, Freddie Mac vice president and chief economist.

However, 30-year fixed mortgages continue to be the loan program of choice, with 69 percent of those who held them previously opting for the same product post-refinance.

Another 19 percent of 30-year fixed borrowers chose 15-year fixed loans, while 11 percent opted for 20-year fixed loans, and the remaining one percent went with a hybrid adjustable-rate mortgage, such as a 5/1 ARM.

Overall, fixed-rate mortgages accounted for more than 95 percent of all refinance loans.

In the first six months of 2010, the ARM-share of mortgage applications was just six percent, including both purchase-money and refinance applications.

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