The refinance boom may be losing steam, but near-record low mortgage rates encouraged more borrowers to refinance in Q4, according to Freddie Mac's 2014 Q4 Refinance Report released Wednesday.
Mortgagors who refinanced their loans in 2014 are projected to save on net a total of about $5 billion in interest over the next year, according to the report.
In the final three months of 2014, low mortgage rates drew more borrowers to refinance their mortgage loans, resulting in lower monthly payments and shorter loan terms. According to Freddie Mac, borrowers "overwhelmingly" went for the security of long-term, fixed-rate mortgages when they refinanced.
"Our latest refinance report shows the refinance boom continued to wind down as the pool of potential borrowers declined over the course of 2014," said Len Kiefer, Freddie Mac's 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."
Approximately $6.7 billion in net home equity was cashed out as part of mortgage loan refinances in Q4, which was low compared with historical volumes, according to Freddie Mac. The Q4 total is down from Q3's revised total of $7.6 billion.
The Q4 total brings the amount of net home equity cashed out for the full year of 2014 to $24 billion, a 16 percent decline from 2013's total of $28.6 billion and a drop of 71 percent from the cash-out refinance volume peak of $84 billion reached in the second quarter of 2006.
"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," Kiefer said. "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."
About 34 percent of borrowers who refinanced during Q4 shortened their loan term, down slightly from 35 percent the previous quarter. Sixty percent who refinanced kept the same term, while only 6 percent lengthened the term of their mortgage loan.
Thirty-five percent of the borrowers who refinanced outside of the government's Home Affordable Refinance Program (HARP) shortened their loan terms compared to 33 percent who refinanced through HARP.
The Federal Housing Finance Agency (FHFA) estimates there are more than 700,000 borrowers nationwide who are eligible to refinance through HARP, which was created in 2009 as part of the government's Making Home Affordable initiative.
Homeowners who refinanced in Q4 lowered their interest rate by an average of 1.3 percentage points, which calculates to about 23 percent—or about $2,500 in interest over 12 months on a $200,000 loan. The interest rate reduction was higher for those who refinanced through HARP—about 1.6 percentage points on average, which calculates to an average savings on interest of $275 per month and $3,300 over 12 months, according to Freddie Mac.
Also according to the report, more than 95 percent of borrowers went with a fixed-rate loan when they refinanced. About 67 percent of borrowers who originally had an adjustable-rate mortgage chose a fixed-rate loan when they refinanced compared to only 4 percent who originally had a fixed-rate loan who went with an ARM when they refinanced.