More borrowers refinancing into fixed-rate loans

The tight spread between interest rates on fixed- and adjustable-rate mortgages means more than eight out of 10 borrowers refinancing out of 1-year or hybrid ARMs are choosing fixed-rate mortgages, Freddie Mac reports.

In the first quarter of 2007, 89 percent of borrowers who originally had a 1-year adjustable-rate mortgage chose a fixed-rate mortgage when they refinanced, compared with 85 percent in the same quarter a year ago.

About 84 percent of borrowers who initially had a hybrid ARM refinanced into 15-, 20- or 30-year fixed-rate loans, up from 76 percent a year ago. Hybrid ARMs carry fixed interest rates for a predetermined period, usually five years, and then adjust every year.

"Mortgage rates on 30-year fixed-rate loans averaged 6.2 percent in the first quarter, while rates on 1-year Treasury-indexed ARMs were 5.5 percent in the Primary Mortgage Market Survey," said Amy Crews Cutts, deputy chief economist for Freddie Mac, in a statement. "In one year, the fully indexed rate that these ARM loans will adjust to exceeds the 30-year fixed mortgage rate today by a wide margin, so borrowers are choosing more and more to take the security of a fixed-rate loan when they refinance."

With rates on amortizing 5/1 hybrids averaging 6 percent, few fixed-rate borrowers are refinancing into hybrid ARMs, Freddie Mac found. About 6 percent of borrowers with 30-year fixed-rate mortgages chose a hybrid ARM when refinancing. Generally speaking, "fixed-rate borrowers like to stay with fixed-rate products," Crews Cutts said in a statement accompanying the release of Freddie Mac's Refinance Transition Report.

Freddie Mac pulls the data in the report from a sample of properties for which it has funded at least two successive loans. The report, which was discontinued for a period when ARM refinancing dipped, is now being released again on quarterly basis along with the Freddie Mac's Cash-out Refinance Report.

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