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Borrowers Cut Their Mortgage Rates by 23% in the Fourth Quarter


The Refi Party Continues

If you thought the refinance party was over, it’s not. It just seems to keep on going, which is a great thing for lenders that specialize in offering refis.

It has been surprising how long it’s gone on given the fact that most Americans already refinanced over the past few years. And interest rates aren’t as low as they once were in recent history, despite being pretty darn low.

Still, borrowers were able to cut their rate by more than a full percentage point during the fourth quarter, this according to the February 2016 Insight & Outlook report from Freddie Mac.

Refi Rate Is 110 Basis Points Lower

In fact, borrowers on average cut their mortgage rate by 110 basis points during the last three months of 2015, a whopping 23% rate reduction.

For example, someone who previously had a rate of 5.125% on their 30-year fixed was able to lower it to 4% when they refinanced.

That’s a pretty compelling reason to refinance, and above the historical norm in terms of rate reduction.

On average, the typical rate reduction is just 13% during refinance, per Freddie Mac, so homeowners who refinanced in the fourth quarter were nearly doubling their benefit.

[The Refinance Rule of Thumb]

It Got Even Better in 2016

Amazingly, rates marched even lower at the start of 2016, and now sit about 40 basis points below levels seen in the fourth quarter.

So that same borrower with the 5.125% rate can now get a rate closer to 3.625% on the 30-year fixed today.

That represents about a 30% discount in rate to the homeowner. On a $300,000 loan, the monthly payment drops from $1,633.46 to $1,368.15, roughly $300 lower per month.

I’m sure that $3,600 in annual savings will come in handy. A lower rate means more of the payment will go toward principal as well, allowing the borrower to gain equity faster.

Higher Refinance Share Projected in 2016

Speaking of equity, Freddie also noted that increases in home equity coupled with low rates should incent more borrowers to refinance.

As a result, the 2016 refinance share of originations has been boosted to 40%. It currently runs around ~60%, per the Mortgage Bankers Association, but purchases are expected to ramp up as home buying season gets in full swing.

Borrowers are also tapping their equity at a higher clip, with 43% of borrowers increasing their loan balance by at least five percent when refinancing (their minimum definition of cash out). That’s up four percentage points from the earlier period.

For the record, fixed-rate mortgages remain king, with more than 95% opting to go with a fixed loan, regardless of what they had prior.

And 83% of borrowers with a hybrid ARM chose a fixed loan in the fourth quarter, with just 17% choosing to jump into another ARM.

I actually mentioned the benefit of an ARM the other day if you’re planning in move in the next five years. You can get a lower rate and not worry about the rate adjustment, knowing the loan will be paid off before it ever adjusts.

Of course, I can see where folks just go with a fixed mortgage seeing how cheap they are at the moment.

Freddie expects the 30-year fixed to average 4.1% in 2016 and 4.8% in 2017, so the refis should continue to roll on in.

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