Borrowers shortening loan terms, but refinancing still low

by Ryan Smith13 Nov 2013

Borrowers who refinanced in the third quarter will see a net savings of $6bn in interest over the next 12 months, according to a study released Tuesday.

According to Freddie Mac’s 2013 quarterly refinance analysis, borrowers continued to take advantage of refinance opportunities during the third quarter, with 37% of refinancing borrowers taking advantage of low rates to shorten their loan terms.

“Mortgage rates on 15-year fixed-rate loans averaged nearly a full percentage point below 30-year loans during the third quarter, providing a financial incentive for homeowners to term shorten,” said Frank Nothaft, Freddie Mac vice president and chief economist. “HARP refinancers have an additional incentive to shorten as some origination fees are waived. By obtaining lower interest rates, borrowers will save approximately $6 billion in interest over the next 12 months, which they can put towards savings, paying down debt or supporting additional expenditures. Further, the estimated $6.4 billion in 'cash-out' activity will further augment borrowers' investment and consumption spending.”

Refinancing volumes remained low compared to historical numbers, however. According to Freddie Mac, about $6.4bn in home equity was cashed out in refinancings during the third quarter – far below the peak of $84bn during the second quarter of 2006. Adjusted for inflation, cash-out volumes since 2010 have been the lowest since 1997, according to Freddie Mac.

And with rates still under 5%, few new homeowners will have an incentive to refinance in the immediate future. The median original loan age before refinancing in the third quarter was 6.7 years – the oldest since Freddie began tracking the variable in 1985.

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