In 3Q11, fixed-rate loans comprised over 95% of refinance loans, according to Freddie Mac's Quarterly Product Transition Report that was published today.

Refinance borrowers preferred fixed-rate loans, the GSE said. It did not matter to them whether their original loan was an ARM or a fixed-rate.

Freddie Mac reported that a rising share of refinancing borrowers opted to shorten their loan terms in 2Q11. Of those who paid off a 30-year fixed-rate loan, 40% chose a 15- or 20-year loan, which is the highest such share since 2Q03. 

Meanwhile, the agency said that 60% of borrowers who had a hybrid ARM chose a fixed-rate loan in 3Q11, while the remaining 37% opted to refinance into the same type of product.

"Fixed mortgage rates averaged 4.29% for 30-year loans and 3.47% for 15-year product during the third quarter in Freddie Mac's primary mortgage market survey, well below long-term averages," said Frank Nothaft, Freddie Mac vice president and chief economist. "The Bureau of Economic Analysis has estimated the average coupon on single-family loans was about 5.3 percent during the third quarter of 2011. It's no wonder we continue to see strong refinance activity into fixed-rate loans.

He added that compared to a 30-year fixed-rate mortgage, the interest rate on 15-year fixed was about 0.8 percentage points less in 3Q11. For those borrowers who want to refinance by low fixed-rates, they can get even lower rates by shortening their term.

The initial interest rate on a 5/1 hybrid ARM was roughly 1.2 percentage points less than on a 30-year fixed-rate loan. For those who plan to stay in their current home for only a few years, Nothaft said that the hybrid ARM allows for more interest-rate savings.

"The extension to the end of 2013 and additional enhancements to the Home Affordable Refinance Program [or HARP], announced on Oct. 24, provide opportunities to eligible borrowers who had not yet refinanced," Nothaft said. "More than 900,000 borrowers have already refinanced via the Program through September. The enhancements provide incentives for eligible borrowers to shorten their loan terms, from 30 years to 20- or 15-years."

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