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Borrowers take advantage of low interest rates to refinance, shorten loan terms

Freddie MacData released by Freddie Mac last week showed that borrowers have continued to take advantage of near-record low interest rates to lower monthly mortgage payments and shorten loan terms.

Borrowers have also increasingly opted for the safety of long-term fixed-rate mortgages. More than 95 percent of refinancing borrowers chose a fixed-rate loan, which were preferable, regardless of what the original loan product was.

Of borrowers who refinanced during the second quarter, 31 percent shortened their loan term, 65 percent kept the same term and four percent opted to lengthen their term.

Additionally, 85 percent of borrowers who refinanced their first-lien mortgage kept about the same loan amount or reduced their principal balance by paying in additional cash at closing. Borrowers who refinanced in the second quarter will likely see approximately $6 billion in interest savings over the next year.

The average interest rate reduction for an individual borrower was approximately 1.9 percent—savings of about 35 percent. Homeowners who refinanced through the Home Affordable Refinance Program during the second quarter will save approximately $358 per month over the next year.

“Borrowers’ refinance characteristics remained fairly consistent with the previous quarter,” Freddie Mac Vice President and Chief Economist Frank Nothaft said. “The cash-out amount, while increasing, continues to remain low by historical standards. And with mortgage rates still near their historic lows, over 30 percent of refinancing borrowers chose to shorten their loan term. On net, borrowers will save approximately $6 billion in interest over the next 12 months, which they can put towards savings, paying down debt or supporting additional expenditures. Further, the estimated $9.5 billion in ‘cash-out’ activity will further augment borrowers’ investment and consumption spending.”

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