Borrowers Refinancing in Q3 Expected to Save $6B Next Year

Despite a steady climb in mortgage interest rates since May, borrowers continued to take advantage of low rates to refinance into lower monthly payments, Freddie Macreported Tuesday.

According to the results of the company’s latest quarterly refinance analysis, the average interest rate reduction among those who refinanced in Q3 was about 1.8 percentage points, representing a savings of about 30 percent ($3,500 over 12 months on a $200,000 loan). For borrowers who refinanced last quarter, the estimated interest savings over the next year will be about $6 billion.

For those who refinanced through the Home Affordable Refinance Program (HARP), the average rate reduction in Q3 was 1.9 percent points, representing savings of $3,850 over the next 12 months.

The number of borrowers deciding to shorten their loan terms last quarter rose 5 percent to a share of 37 percent, the highest level since 1992, Freddie Mac reported. Out of those who refinanced outside of HARP, 40 percent shortened their term; 32 percent of HARP borrowers did the same.

Out of all refinancers, 59 percent kept the same term, and 4 percent lengthened their term.

The vast majority—more than 95 percent, according to Freddie Mac—of refinancing borrowers went with a fixed-rate loan in Q3, with fixed rates being preferable regardless of what the original loan product had been. Only 3 percent of borrowers who had a fixed-rate late chose to refinance into an adjustable-rate mortgage.

The median age the original loan was outstanding before refinance in Q3 was 6.7 years, an increase from Q2 and the highest age since analysis began in 1985.

“With mortgage rates remaining below 5 percent for most of the past four years, relatively few homeowners with loans taken in this period would have much incentive to refinance,” Freddie Mac said in its report.

An estimated $6.4 billion in net home equity was cashed out during third-quarter refinances of prime-credit home mortgages—a low level compared to historical volumes. Cash-out refinance volume peaked at $84 billion during the second quarter of 2006; adjusted for inflation, annual cash-out volumes from 2010-2013 have been the smallest since 1997.

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