An analysis of 1 million fixed-rate mortgages in the United States shows that millions of Americans failed to refinance when mortgage rates were at historical lows, which could have amounted to savings for the median home owner of more than $45,000 in payments over the life of their loan.
In December 2010, 20 percent of American households with fixed-rate mortgages could have refinanced but failed to do so, according to the study by the National Bureau of Economic Research. At the time, the average interest rate was around 4.3 percent.
The upfront cost of refinancing — which usually is a few thousand dollars, depending on the value of the loan — may have deterred some home owners. But even when taking into account such factors, researchers estimated that around 41 percent of these home owners still would have benefited from refinancing in December 2010.
Some home owners may have been concerned about qualifying. Lenders look at various factors when refinancing, such as the home’s value, payment history, credit scores, among other financial data. But even when the researchers decreased their study’s sample to those with just excellent credit histories who had never missed a payment, they still found that an estimated 20 percent of home owners stood to gain from refinancing and would have qualified for one too.
As such, the researchers partnered with Neighborhood Housing Services of Chicago, a lending nonprofit, to identify those who would qualify for and benefit from refinancing and mailed letters to offer to help with refinancing. Only about 17 percent of the home owners who received the letters ended up refinancing after the letters were sent, and the majority of home owners who received the letters never replied.
The researchers followed up with those who were sent letters, and a quarter of the home owners said they never opened the letter while another quarter said they did open the letter and meant to follow up but never got around to it.
The median savings for households of those who did not respond to the offer was $26,400 over the lifetime of the loan, or about $94 a month, according to the study.
Other studies have shown home owners leery about refinancing as well. A study by Fannie Mae had asked eligible borrowers why they chose not to refinance under the government’s HARP program, and 22 percent said it was because they did not trust the lender who contacted them, and 18 percent said they didn’t know they qualified.
In general, the researchers in the NBER study concluded that the results are “consistent with both behavioral explanations such as procrastination and inattention, as well as lack of information as possible reasons why households fail to respond to offers that appear to be in their financial best interest.”
One anecdotal reason, however, reveals that many financial institutions were less than genuine in their efforts to reduce interest on loans that were earning them a higher rate of return. A number of homeowners that explored refinancing were left with a distasteful experience of wading through barriers of red tape which served as a barrier to their success.
source: Washington Post and realtor.com®