FEB 4, 2014 1:27pm ET

Refis to Slump Again This Year, Freddie Mac Says

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The number of borrowers who refinance their mortgages will continue to dwindle in 2014, according to a report from Freddie Mac.

Refinances will make up just 38% of single-family originations this year—down from 60% in 2013 and 70% in 2012, according to Freddie Mac’s Tuesday press release. Rising long-term interest rates and a shrinking pool of potential borrowers have combined to slow refinancing activity in recent months, Freddie Mac’s chief economist Frank Nothaft says in the release.

Borrowers who do refinance are increasingly likely to shorten their loan terms, according to the report. Thirty-nine percent of refinancing borrowers reduced their loan terms in the fourth quarter of 2013—a 2% increase from the previous period, and the highest amount since 2012. Just 5% chose to lengthen the terms of their loans. A majority (56%) stuck with the same timeline.

Refinancing borrowers also showed a marked preference for fixed-rate loans in the fourth quarter. Among borrowers who previously had hybrid adjustable-rate mortgages, 94% switched to a fixed-rate loan during refinancing. Overall, 95% of refinancing homeowners chose fixed-rate mortgages.

The report also shows an uptick in the number of borrowers who make extra loan payments before refinancing. Before the financial crisis, between 3% and 9% of borrowers paid down loan principal faster than scheduled.

“Since then, about 11% to 19% have paid down additional principal prior to refinancing,” the report says. “This could reflect the decision of some borrowers to pay down the principal further to avoid paying mortgage insurance.”

Freddie Mac’s quarterly refinance report samples properties on which the agency has funded two successive first-mortgage loans and the latest loan is for refinance.

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