Borrowers Who Refinanced In Q-1 Will Lower Their Interest Expense in Aggregate $2 Billion in 2010

Residential News » Residential Real Estate Edition | By Michael Gerrity | April 28, 2010 5:14 PM ET

According to Freddie Mac's quarterly Refinance Report, one-half of borrowers who refinanced their conventional loans in Q-1, 2010 will have lowered their mortgage interest rate by at least 16 percent. The new interest rate was 0.9 percentage points or more below the old rate for one-half of borrowers.

"Rates on 30-year fixed-rate mortgages during the first quarter remained low, averaging 5.0 percent in Freddie Mac's Primary Mortgage Market Survey," noted Frank Nothaft, Freddie Mac vice president and chief economist. "The median interest-rate savings for borrowers who refinanced their conventional loan in the first quarter was 0.9 percentage points. Refinances were about three-fourths of originations during the first quarter. In total, the lower rate translates into about $2 billion in interest savings for these borrowers over the first 12 months of the new loan."

Further, 72 percent of borrowers who refinanced kept their loan balance largely unchanged or reduced their loan balance outstanding as a result of the refinance. This latter group, who placed "cash-in" to their home as part of the refinance, represented 18 percent of all borrowers who refinanced during the first quarter. "Cash-out" borrowers, those that increased their loan balance by at least 5 percent, represented 28 percent of all refinance loans; the cash-out shares recorded over the last two quarters were the lowest since the analysis began in 1985.

In the first quarter, about $9 billion in home equity was cashed out by homeowners when they refinanced their conventional prime-credit home mortgage, the smallest quarterly inflation-adjusted amount in ten years, since the third quarter of 2000. The main causes of the decline in cash-out refinance were reduced home prices and tighter underwriting standards for loan-to-value ratios. Among the refinanced loans in Freddie Mac's analysis, the median appreciation of the collateral property was a negative 4 percent over the median prior loan life of 4.0 years.

These estimates come from a sample of properties on which Freddie Mac has funded two successive loans, and the latest loan is for refinance rather than for purchase. The analysis does not track the use of funds made available from these refinances.

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