Low Rates Luring Borrowers To 15-Year Fixed-Rate Refis

low. And most borrowers are choosing 15-year fixed-rate mortgages when they refinance. Refinanced mortgages now account for 38% of total mortgage activity, according to last week's study by the Mortgage Bankers Association of America. Refinancing volume has increased almost 50% from a year ago, the study says. A lot of this volume is going to 15-year fixed-rate loans, which have reached their highest demand this year among borrowers who are refinancing, according to the Federal Home Loan Mortgage Corp.'s quarterly refinancing survey. Sixty-five percent of borrowers holding 15-year fixed-rate mortgages refinanced to similar mortgages in the third quarter, compared with 58% in the second quarter and 37% in the first, the study says. The difference between the 15-year mortgage rate and the adjustable rate has narrowed more than 60 basis points since January. "The narrowing gap between long-term and short-term interest rates is making fixed-rate mortgages, particularly the 15-year product, very attractive for refinancing borrowers," agreed Vassilis Lekkas, senior economist at Freddie Mac. Some consumers are even choosing to refinance their 30-year fixed-rate mortgages into 15-year loans. "Rates have come down so much, that it's much more economical to go to 15-year fixed-rate mortgages," rather than 30-year fixed-rate mortgages, said David Lereah, chief economist for the Mortgage Bankers Association. Homebuyers almost always purchase as much house as they can afford, he added, and often opt for 30-year mortgages to make payments as small as possible. But many are taking advantage of low rates to pay off their debt as soon as possible. Right now borrowers can refinance into a 15-year mortgage, keep payments roughly the same as they were with their old 30-year mortgage, and build up their equity, Mr. Lereah said. The big loser among refinancing options is adjustable-rate mortgages, with just 11% of existing adjustable-rate mortgage borrowers refinancing into a similar loan this quarter. This is the lowest ratio since the end of 1991, according to Freddie Mac. The quarterly refinancing survey is based on mortgages for which Freddie Mac purchased both the original and the refinanced loan. Ultimately, the shift to shorter-term mortgages may mean less servicing volume and less mortgage debt down the road. That could be bad news for lenders and servicers. But "things have a way of turning around," Mr. Lereah said. "If rates go up another 25 basis points, the balance will swing back to 30-year fixed- rate mortgages."

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