15-Year Fixed-Rate Mortgages Gain in Popularity With Low Interest Rates

McLean, VA – Freddie Mac (NYSE:FRE) announced today that in the fourth quarter of 2008, 97 percent of prime borrowers who originally had a conforming adjustable-rate mortgage (ARM) chose a new conforming fixed-rate mortgage when they refinanced, up from a revised 85 percent in the third quarter. Furthermore, 99.7 percent of borrowers who had a fixed-rate loan refinanced into another long-term fixed-rate loan, up from a revised 97 percent in the third quarter.

"The very low interest rates for fixed-rate loans compared with ARM rates in the fourth quarter, combined with worries that rates may rise in the future when the economic recession ends, enticed refinancing borrowers to seek the security of long-term fixed-rate mortgages," said Frank Nothaft, vice president and chief economist for Freddie Mac. "When borrowers can lock in a rate of 5 percent or less for 15 years or longer, it’s hard to find a reason not to take it.

"During much of the fourth quarter, initial interest rates on hybrid ARM loans were close to or above interest rates on 15-year and 30-year fixed-rate mortgages. In that pricing environment, fixed-rate loans appear very attractive to borrowers. As a consequence, nearly all borrowers who refinanced chose a fixed-rate loan."

The Refinance Product Transition Report indicates that only 3 percent of borrowers who initially had a hybrid ARM refinanced back into that product, down from 15 percent who chose to refinance back into another hybrid ARM in the third quarter. But overall, hybrid ARMs were more popular in 2008 among borrowers who initially had such loans than they were in 2007. Seventeen percent of hybrid ARM borrowers refinanced back into a hybrid ARM in 2008 versus 14 percent in 2007. In contrast, refinancing borrowers who initially held 1-year ARMs chose fixed-rate mortgages over any ARM product more often in 2008 than they did in 2007.

These estimates come from a sample of properties on which Freddie Mac has funded at least two successive loans and the latest loan is for refinance rather than for home purchase.

Source:  FreddieMac, www.freddiemac.com