As a result of the foreclosure crisis and risky lending practices consumers have witnessed over the last decade, homeowners areflocking to fixed rate mortgages in mass, according to Freddie Mac. Fixed rates accounted for 95% of refinancing based on the giant lenders’ new quarterly report for 2011.
Fifty-five percent of borrowers who had an adjustable rate loan in the second quarter chose a fixed-rate loan, while 45% chose to refinance into an adjustable. The share of refinancing from hybrid ARM to hybrid ARM was the highest since the second quarter of 2004.
Fixed rates and adjustable rate mortgages have dropped much lower since the second quarter of the year. Near record low mortgage rates are driving a flurry of refinancing activity to boost the mortgage lending market, which had been in the doldrums until recently.
The record foreclosure crisis has gotten homeowners attention. Refinancing mortgage borrowers clearly prefer the security and peace of mind of having a fixed rate mortgage on their homes, regardless of whether their original loan was fixed or an adjustable.
An increasing number of homeowners refinancing mortgages also chose to shorten the life of their home loans. More than one out of three or 37% chose 15 or 20-year loans, the highest share since 2003. The 30-year fixed rate averaged 4.65% during the period, while the shorter 15-year fixed rate mortgage was even lower.
“Compared to a 30-year fixed rate mortgage, the interest rate on 15-year fixed was about 0.8 percentage points lower during the second quarter,” said Freddie Mac chief economist Frank Nothaft. “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.”
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