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Freddie Mac: 27% of Q4 Refinancers Shortened Loan Terms

Data released by ""Freddie Mac"":http://www.freddiemac.com/ shows more than a quarter of borrowers who refinanced in Q4 2012 chose to shorten their loan terms.

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According to the GSE's Quarterly Product Transition Report released Tuesday, 27 percent of borrowers opted to shorten their loan term when refinancing. Sixty-nine percent kept the same term as the loan that they had paid off, while 4 percent lengthened their loan term.

Based on year-long data for 12 large metro areas, Freddie Mac found an average 29 percent of borrowers across these metros chose to shorten their loan terms.

""Fixed mortgage rates averaged 3.36 percent for 30-year loans and 2.67 percent for 15-year product during the fourth quarter in Freddie Mac's Primary Mortgage Market Survey, the lowest quarterly averages recorded in our survey,"" explained Frank Nothaft, VP and chief economist at Freddie Mac. ""For borrowers motivated to refinance by low fixed-rates, they could obtain even lower rates by [COLUMN_BREAK]

shortening their term. Further, a shorter-term, fully amortizing loan reduces the loan balance faster and builds home equity sooner.""

In addition, borrowers who lived in lower-priced metros last year were generally more likely to shorten their term compared to borrowers in high-cost markets. For example, 43 percent of borrowers in the Dallas area shortened their term, while only 14 percent of those in San Francisco did the same.

""Borrowers with smaller loan balances can shorten their loan term when refinancing with smaller dollar increases in their monthly payment than borrowers with large loan balances. That's an important reason why a larger percent of borrowers in a low housing cost market shorten their term when compared to borrowers in very high cost markets,"" Nothaft said.

The report also shows that refinancing borrowers overwhelmingly preferred fixed-rate loans last quarter, with more than 95 percent selecting a fixed-rate product. In addition, 83 percent of borrowers who had a hybrid adjustable-rate mortgage (ARM) chose a fixed-rate loan in the fourth quarter--the highest share since Q2 2010--while the remaining 17 percent refinanced back into a hybrid ARM.

According to the quarterly report, borrowers who refinanced under the Home Affordable Refinance Program (HARP) were more likely to take out a long-term, fixed-rate mortgage: Out of HARP borrowers who refinanced out of an ARM, more than 95 percent chose a fixed-rate loan, while more than one-third of non-HARP ARM borrowers opted for another ARM.

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