People who refinance their mortgages are overwhelmingly opting for fixed-rate loans, which made up 95 percent of all refinances in the fourth quarter of 2010.That's due in part to borrowers becoming more conservative in their loan choices since the economic downturn began. But it's also due to some of the lowest interest rates in half a century, which fixed-rate loans an easy choice for borrowers to make.

"It's no wonder borrowers are attracted to fixed-rate loans," said Frank Nothaft, chief economist for Freddie Mac, which released the figures on Tuesday. He noted that interest rates on 30-year fixed-rate loans fell as low as 4.17 percent in mid-November, the lowest figure since the early 1950s.

The low rates also spurred interest in refinancing into shorter terms as well, which became more affordable as a consequence. Nearly one-third of all borrowers who refinanced out of a 30-year loan during the quarter chose a 15- or 20-year fixed-rate mortgage to replace it, the highest share in nearly seven years.

Interest rates on 15-year fixed-rate mortgages were running about five-eights of a percentage point below that of the 30-year loan, Nothaft said, meaning that borrowers motivated to refinance by low interest rates could reduce them even more by opting for a shorter term.

The fourth-quarter figures reflect an overwhelming shift in borrower preferences from just a few years ago, when adjustable rate mortgages (ARMs) were the loan of choice. According to the New York Federal Reserve, ARMs made up as much as 70 percent of all new mortgages in 1994, but their popularity fell sharply as the declining housing market exposed some of their shortcomings.

Even so, some observers are beginning to say that ARMs may be starting a comeback. After interest rates on fixed-rate mortgages climbed sharply following their all-time lows in November, initial rates on ARMs rose a bit more slowly. With 5-year ARMs running about a full percentage point below 30-year fixed-rate mortgages, borrowers looking to trim their monthly payments could again start finding them more attractive, particularly as fixed-rate loans return to levels generally regarded as normal.

Published on February 16, 2011