Borrowers Who Refinanced in 2014 Saved Billions in Interest Payments
Freddie Mac recently released the results of its fourth-quarter 2014 quarterly refinance analysis, showing that borrowers are continuing to take advantage of near record-low mortgage rates to lower their monthly payments. The analysis also showed borrowers are shortening their loan terms and choosing the safety of long-term fixed-rate mortgages as they closed out the year. Borrowers who refinanced in 2014 will save approximately $5 Billion in interest over the next 12 months. The release of this report also contains annual statistics on refinances for the 22 largest metropolitan areas and four Census regions of the U.S.
"Our latest refinance report shows the refinance boom continued to wind down as the pool of potential borrowers declined over the course of 2014,” says Len Kiefer, Freddie Mac deputy chief economist. “However, because mortgage rates fell in the fourth quarter of last year, we actually saw the share of refinance originations tick up a bit despite volumes being down, a similar trend we expect to see for the first quarter of 2015 as mortgage rates have moved even lower. Lower mortgage rates, coupled with greater house prices appreciation last year, also brought about a larger share of borrowers cashing out home equity at the time of refinance. However, while the percentage is up, the total dollar amount declined by nearly $1 Billion from the third quarter of 2014, and nearly $4.6 Billion from the fourth quarter 2013."
The net dollars of home equity converted to cash as part of a refinance remained low compared to historical volumes. In the fourth quarter, an estimated $6.7 Billion in net home equity was cashed out during a refinance of conventional prime-credit home mortgages, down from a revised $7.6 Billion the previous quarter. For the full year, an estimated $24 Billion in net home equity was cashed out, down from $28.6 Billion in 2013. The peak in cash-out refinance volume was $84 Billion during the second quarter of 2006, with an annual volume of $320.6 Billion. Adjusted for inflation, annual cash-out volumes during 2010 through 2014 have been the smallest since 1997.
Of borrowers who refinanced during the fourth quarter of 2014, 34 percent shortened their loan term, down from 35 percent from the previous quarter. Further, 35 percent of those who refinanced outside of HARP took out a shorter-term loan, while 33 percent of HARP borrowers shortened their term. Borrowers who kept the same term as the loan that they had paid off represented 60 percent and only 6 percent chose to lengthen their loan term.
The average interest rate reduction in the fourth quarter was about 1.3 percentage points, a savings of about 23 percent. On a $200,000 loan, that translates into saving about $2,500 in interest during the first 12 months. Homeowners who refinanced through HARP during the fourth quarter of 2014 benefited from an average rate reduction of 1.6 percentage points and will save an average of $3,300 in interest during the first 12 months or about $275 every month.
About 71 percent of those who refinanced their first-lien home mortgage maintained about the same loan amount or lowered their principal balance by paying in additional money at the closing table. That's shy of the 88 percent peak during the second quarter of 2012.
More than 95 percent of refinancing borrowers chose a fixed-rate loan. Fixed-rate loans were preferred regardless of what the original loan product had been. For example, 67 percent of borrowers who had a hybrid ARM refinanced into a fixed-rate loan during the fourth quarter. In contrast, only 4 percent of borrowers who had a fixed-rate loan chose an ARM.
For all other (non-HARP) refinances during the fourth quarter, the median property value was up 5 percent between the dates of placement of the old loan and the new refinance loan. The prior loan had a median age of 5.8 years and 35 percent of borrowers shortened their loan term.
In metro areas where house price declines were more severe, the share of "cash-out" borrowers was smaller. Median house values on refinance loans have declined in 11 of the 22 large metro areas included in the report, with the sharpest declines in Detroit and Tampa. Of the 22 areas, San Francisco and Houston were the metro areas where median house prices increased the most.
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