McLEAN, VA  – In a recent study by Freddie Mac, they found that in the first quarter of 2007, 89 percent of borrowers who originally had a 1-year adjustable-rate mortgage (ARM) chose a new fixed-rate mortgage when they refinanced and 84 percent of borrowers that initially had a hybrid ARM did so as well.

“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 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.

“We do see some fixed-rate borrowers refinancing into hybrid ARMs, which are fixed for a period, most often for five years, and then become adjustable every year thereafter.  Mortgage rates on amortizing 5/1 hybrids averaged 6.0 percent in the first quarter, but borrowers can cut their monthly payments further by opting for an interest-only hybrid ARM loan.  Just 6 percent of borrowers who had a 30-year fixed-rate mortgage chose a hybrid ARM of some type when they refinanced in the first quarter.  Generally speaking, fixed-rate borrowers like to stick with fixed-rate products.  This was true even in 2004, when there was a wide gap between 30-year fixed mortgage rates and 1-year ARM rates, making ARMs relatively very attractive, and just 8 percent of 30-year fixed-rate borrowers jumped over to an ARM product when they refinanced.”

The Refinance Product Transition Report indicates that refinancing into the 30-year fixed-rate mortgage (FRM) among borrowers who originally had a different loan product decreased in the first quarter of 2007 relative to the fourth quarter of 2006.  However, 82 percent of borrowers originally holding 30-year FRMs decided to refinance back into the same product, compared to 81 percent in the fourth quarter of 2006, and 77 percent a year ago, in the first quarter of 2006.

Borrowers who originally had a 1-year ARM, with interest-rate adjustments occurring on equal frequencies for the life of the loan, stayed with a 1-year ARM product 2 percent of the time when they refinanced in the first quarter of 2007, level with the share in the last quarter of last year but down from 3 percent a year ago.  Seven percent of 1-year ARM borrowers switched into a hybrid ARM product in this quarter, down from 9 percent in the fourth quarter of 2006 and also down from 10 percent in the first quarter of 2006.

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