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Refis Helping Consumers Reduce Mortgage Debt

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In recent months, with mortgage rates hovering at or near all-time lows, consumers may have been more eager to refinance their existing home loans rather than seek new living arrangements, and many who did so saved a significant amount of money.

In the first quarter of the year, 79 percent of homeowners who refinanced the mortgages on their primary residences either maintained the same principal balance or were able to lower it by paying more at the bargaining table, according to new data from the mortgage backing giant Freddie Mac. In all, about 58 percent of refinancers kept their balance the same but enjoyed lower interest rates as a result of their action, and 21 percent paid more into their principal. Meanwhile, “cash-out” borrowers, who increased their loan balance by 5 percent or more, made up the remaining 21 percent, but that was well below the cash-out average observed between 1985 and 2008, which stood at 50 percent.

“The typical borrower who refinanced reduced their interest rate by about 1.5 percentage points,” said Frank Nothaft, vice president and chief economist for Freddie Mac. “On a $200,000 loan, that translates into saving about $2,900 in interest during the next 12 months. Fixed-rate mortgage rates hit new lows during March, with 30-year product averaging 3.95 percent and 15-year averaging 3.20 percent that month, according to our Primary Mortgage Market Survey.”

The result of consumers cutting their interest rates by an average of 1.5 percent is substantial, the report said. That equates to a drop of about 27 percent of their total rate, the largest reduction observed in the 27 years Freddie Mac has been conducting this analysis of the refinance industry.

The median prior loan life on those mortgages that were refinanced in the first three months of 2012 was about 4.3 years, the report said. About half of the loans that were paid off had been in place for between three and seven years, having been originated between 2005 and 2009.

Low interest rates have been lingering for months and even as home buying remained stagnant, refinance activity remained strong throughout much of the last year. However, in recent weeks, the refinance share of the mortgage industry has been slipping, indicating that consumers are more interested in buying new properties once again, which may show that the housing market is now recovering.

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