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Fewer Refinancers Interested in Shortening Loan Terms

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Refinancing a mortgage has become a popular option for current homeowners in the last year or so, as rates have held steady at well below 4 percent for some time. However, new data show that in general, the number of people who also use the refinancing opportunity to shorten their loan terms is shrinking.

In the fourth quarter of last year, the percentage of refinancers who opted to reduce their loan terms along with their interest rates shrank to 27 percent, down slightly from the previous quarter, and significantly on a year-over-year basis, according to new data from the government-sponsored Freddie Mac. For the entire calendar year of 2012, the total amount of refinancers who opted to use the opportunity to reduce their loan terms stood at 29 percent.

“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 Freddie Mac chief economist and vice president Frank Nothaft. “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.”

Interestingly, this trend was particularly evident in major metropolitan areas with low home prices in general, and the opposite was true for cities with higher values, the report said. For instance, in Dallas 43 percent of those who refinanced also shortened their loan terms. On the other hand, San Francisco saw just 14 percent of refinancers do the same.

In addition to those who reduced their loan terms, the vast majority – 69 percent – instead decided to keep it the same as it was prior to the refinance, the report said. Another 4 percent chose to make their terms longer. Further, more than 95 percent of those borrowers also chose to rely on fixed-rate loans when refinancing, and this preference was observed among both those who already had FRMs, as well as those who previously had adjustable mortgages instead.

Today, the average refinancers are cutting their mortgage rates by large percentages, as many may have obtained the loans when rates were closer to 5 or 6 percent. By choosing to restructure the terms of their existing loan, they can save themselves thousands of dollars per year in mortgage payments.

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