Of the small pool of homeowners still refinancing their mortgages, a growing share are trading in lower monthly payments for the opportunity to pay down their debt faster.

The trend bodes well for banks looking for assets to put on the balance sheet.

"As a general rule a bank does not want to hold 30-year fixed-rate mortgages in its portfolio," says Frank Nothaft, the chief economist at Freddie Mac. "It prefers instruments with shorter terms that reprice more frequently."

The percentage of borrowers choosing to refinance a 30-year fixed-rate mortgage with a 15- or 20-year fixed-rate mortgage is at its highest level since 2004, according to Freddie Mac.

Greater demand for short-term (but fully amortizing) loans is also indicative of a major shift in consumers' attitude toward residential real estate as an investment.

Borrowers no longer see their homes as piggy banks, or as an investment that will enable them to trade up, said Kurt Noyce, president of Embrace Home Loans in Newport, R.I.

"Now that the real estate market has been so adversely affected, they know that the only homes being sold today are the ones you have to sell," he says.

"We are seeing people trying to minimize their debt service, since they won't be selling their property."

"People are getting back to what it used to be," agreed Richard Booth, a mortgage banker with America's First Funding Group in Neptune, N.J. "You pay it off, and you try to get back to being debt free."

Today's refinance activity is being driven by so-called rate and term borrowers who are trying to diminish their long-term debt, experts say.

This differs from some previous refi booms when borrowers were motivated to refinance as a way to take cash out.

Over the last four quarters, Freddie Mac economists have seen the highest percentage of cash-in refinances since they began tracking such data 25 years ago.

"We are seeing a phenomenon similar to the 2003 to early 2004 refinance boom," Nothaft says.

"In 2003 interest rates dropped to what had been the lowest level of mortgage rates in 40 years, and boom, everybody was out there refinancing. And disproportionately it was the rate and term refi borrowers."

The extraordinarily wide spread between short- and long-term interest rates — a result of the Federal Reserve's quantitative easing programs — is helping to drive demand for 15- and 20-year fixed-rate mortgages.

Under QE2, the shorthand term for the Fed's most recent monetary easing program, the central bank is targeting middle-range Treasury notes, which is especially advantageous for 15- and 20-year fixed-rate mortgages.

"By the Fed's activities helping to foster low interest rates, especially for shorter-term instruments, that is being reflected in the mortgage market," Nothaft says. "So in some sense the mortgage yield curve is steep as well."

Currently the average interest rate on a 30-year fixed-rate mortgage is averaging about 4.51%. The rate on a 15-year is averaging about 3.69%.

The lower interest on the 15-year fixed-rate mortgage makes the increase in payments required to cover the shorter-term loans considerably lower than they otherwise would be.

And that's helping more borrowers qualify.

Even borrowers who are underwater have the option to refinance if they have been making their payments on time, Noyce says.

"If your payment history has been satisfactory," Fannie Mae and Freddie "will allow financing for" mortgages with a loan-to-value ratio of over 100," Noyce says. "It makes sense for them, these customers who demonstrated that they could pay their loans at a higher rate."

Keith Gumbinger, vice president of HSH.com, a mortgage information website, said that in today's environment some borrowers' monthly payments may not go up much, if at all.

"Equity is produced in two ways: market appreciation and the retirement of the loan's balance," Gumbinger said by email. "Since there isn't any of the former going on, it goes without saying that the best way to build equity is to retire debt more quickly."

Lenders are happy to see any demand for mortgages.

Overall, mortgage volume has dropped precipitously over the past several quarters, but refinancings continue to make up the bulk of activity.

According to the latest estimates by the Mortgage Bankers Association, refinancings totaled $196 billion in the first quarter, down 12% from a year earlier, while purchase volume totaled $106 billion, also down 12% from the year-earlier period.

Refinancings made up 65% of all mortgage origination volume in the quarter, unchanged from the first quarter of 2010.


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