If you haven’t refinanced your mortgage yet, you could be leaving tens of thousands of dollars on the table.
Interest rates have bounced around historical lows for years, yet a surprising number of homeowners who could benefit from a refinancing still haven’t taken advantage of the potential cost savings, Ed Conarchy, a mortgage adviser for Cherry Creek Mortgage in Gurnee, Illinois, said in a new Bankrate report issued Monday.
The reasons for that may surprise a lot of us: Some people are simply unaware of their current rate or don’t have the get-up-and-gumption to refinance, experts say.
In 2014, the rate on a 30-year fixed mortgage averaged 4.24 percent. Rates have remained near the bottom, around 3.8 percent so far this year, down from well above 6 percent in 2008. The Mortgage Bankers Association forecasted that rates might increase to a little to over 5 percent by the end of the year.
Even if refinancing a mortgage makes sense financially, there’s always a portion of the U.S. population that fails to do so, economists from the University of Chicago and Brigham Young University found in a recent working paper for the National Bureau of Economic Research.
“In December 2010, approximately 20 percent of households that appeared unconstrained to refinance and were in a position in which refinancing would have been beneficial had failed to do so,” according to an NBER working paper called “Failure to Refinance.”
While refinancing doesn’t always make sense for everyone, homeowners can find out pretty easily whether it’s the right decision for their situation by doing some quick math.
Refinancing a 30-year fixed-rate mortgage of $200,000 from 6.5 percent to 4.5 percent will save more than $80,000 in interest payments over the life of the loan, even after taking into account typical refinancing costs, according to NBER. With long-term mortgage rates at roughly 3.35 percent, this same household would save roughly $130,000 over the life of the loan by refinancing.
That’s several hundreds of dollars every month: Refinancing a $200,000 30-year loan from 6 percent to 3.8 percent would save $267 a month, according to Bankrate calculations. Refinancing it from 8 percent to 3.8 percent would save $536 a month.
Beyond not knowing about the potential savings, many homeowners aren’t aware of the interest rates on their loans or the details have gotten away from them in their day-to-day scramble – that’s one of the reasons they have ignored the current low interest rates.
“As consumers, once we get the mortgage, we sweep the rate under the rug and we don’t worry about it,” Conarchy said. “So we don’t look at rebalancing or refinancing opportunities.”
A Bankrate survey found that only 65 percent of homeowners said they are very confident they know their rate, while more than one third of borrowers (35 percent) are only somewhat confident, not confident or simply say they don’t know their rate at all.
The NBER working paper mentioned other reasons why people fail to refinance their mortgage despite obvious financial benefits.
“There may be information barriers regarding potential benefits and costs of refinancing,” the economists wrote, adding that psychological factors, such as procrastination, mistrust and the inability to understand complex decisions may also be barriers to refinancing.
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