Research released by the National Bureau of Economic Research shows 20 percent of households for whom refinancing would be optimal failed to refinance in December 2010, costing them tens of thousands of dollars in savings.
In “Failure to Refinance,” researchers Benjamin Keys, Devin Pope, and Jaren Pope found that U.S. households could have saved $1.5 billion dollars had they refinanced, with the median having the potential to save $160 per month on the remaining life of their existing loan.
“We became interested in this topic after hearing anecdotes from friends and neighbors about how they knew people who were leaving loads of money on the table. We wanted to move beyond just anecdotes and try to understand more broadly how many people may be failing to refinance when it seemed like they could or should,” Devin Pope said.
Borrowers lose out on big money when they fail to take advantage of low interest rates and refinance. For example, a household with a 30-year, fixed-rate mortgage of $200,000 at an interest rate of 6.5 percent that refinances when rates fall to 4.5 percent will save over $80,000 in interest payments over the life of the loan, even after including all the typical refinancing costs. Mortgage rates were around 4.7 percent in December 2010, higher than the current rate of 3.5 percent. Still, many homes fail to refinance.
“Some obvious obstacles include lack of information and the time cost associated with refinancing," Pope said. “However, behavioral economics has also suggested that things like procrastination and attention could be important factors.”
The Federal Housing Finance Agency and the Department of Treasury launched the Home Affordable Refinance Program in 2009, just a year before this data was collected. An estimated four to five million borrowers whose loans were owned by Fannie Mae or Freddie Mac were predicted to take advantage of this new program, but by September 11th fewer than a million mortgagors had refinanced under HARP.
Pope suggests making the refinance process more simple or automatic could combat some of the barriers people face when trying to refinance. Authors of the study also suggest offering more in-depth workshops and counseling could provide homeowners with more financial education and break down some of the barriers they face in refinancing.
According to information release by the U.S. Department of Housing and Urban Development in January over 12,000 people used HARP to refinance their homes in November 2014 and about 3.2 million people have taken advantaged of HARP since it was introduced in 2009.
Last June the FHFA announced new efforts to reach eligible homeowner who have yet to refinance their homes through HARP. FHFA launched an interactive map which shows there are more than 625,000 homeowners who could refinance through HARP. They have also been holding outreach events to attract more eligible homeowners, with the next event set to happen in New Jersey on March 4.
"We know that there are hundreds of thousands of borrowers who can still benefit from HARP and are essentially leaving money on the table by not taking advantage of the program," said Melvin Watt, director of the FHFA. "By engaging directly with local community leaders, faith-based organizations, local elected officials, and lenders, our goal is to leverage these trusted sources to reach as many 'in-the-money' borrowers as we can."