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27 Percent of Refis Cut Loan Term

Posted: 2/13/2013 11:50:00 AM
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Over one-quarter of borrowers who refinanced their mortgage late last year chose to shorten their loan term, a trend that was even more pronounced in areas with lower home values.

According to a new report from Freddie Mac , 27 percent of homeowners who refinanced their mortgage in the fourth quarter of 2012 chose to accelerate their payment schedule compared to their old mortgage. Only 4 percent chose a longer loan term.

Of those refinancing from a 30-year fixed-rate mortgage, 19 percent opted for a 15-year fixed-rate loan, while 11 percent chose a 20-year fixed rate mortgage, with nearly all the rest choosing to stay with a 30-year fixed-rate mortgage. Only 1 percent chose to go with an ARM.

Dallas, Detroit lean toward shorter loan terms

Not surprisingly, homeowners in lower-priced housing markets were more likely to choose a shorter loan term than those in higher-priced ones. For the year, 43 percent of those who refinanced in the Dallas area opted to shorten their mortgage term, as did 38 percent of those refinancing in the Detroit market. Meanwhile, only 14 percent did so in the high-priced San Francisco market and only 16 percent chose shorter terms when refinancing in the Los Angeles area.

"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," said Frank Nothaft, Freddie Mac chief economist. "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."

Cash-out refis dwindle

Cash-out refinancing, where a homeowner borrowers against their home equity in order to take money out of the transaction when refinancing, continues to decline in popularity. Only 16 percent of all mortgage refinances were cash-out in the fourth quarter of 2012, down from 30 percent as recently as early 2010 and almost 90 percent just before the housing bubble burst in 2006.

Borrowers took out only $8 billion doing cash-out refinances in the fourth quarter of 2012, compared to nearly $100 billion at the peak of the market in the second quarter of 2006

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