Tags: mortgage | refinance | homeowner | rate

NBER: Failure to Refinance Is a Major Mistake for Homeowners

By Michael Kling   |   Thursday, 04 Sep 2014 12:43 PM

Homeowners lose thousands of dollars when they don't refinance into lower interest rates, a new study from the National Bureau of Economic Research estimates.

The study finds that approximately 20 percent of households who could have and ideally should have refinanced to take advantage of lower rates did not do so.

"We estimate the present-discounted cost to the median household who fails to refinance to be approximately $11,500, making this a particularly large consumer financial mistake," the authors state.

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Many homeowners are not aware of falling interest rates or the favorable financial impact of refinancing. The study suggests that mortgages that automatically refinance to a lower rate would help less financially savvy homeowners.

"The refinance decision is a complex one because households need to translate the change in interest rates to a change in monthly payments," Benjamin Keys, a paper co-author and University of Chicago professor, tells the International Business Times. "Households may not have a grasp of just how big a difference a relatively small change in interest can have on their bottom lines."

Homeowners may also be reluctant to complete the paperwork or foot the closing costs a refinance requires.

The paper's finding is unwelcome news for Federal Reserve monetary policy makers hope to stimulate the economy by reducing interest rates. Savings homeowners gain through refinancing produce a substantial ripple effect as they flow through the economy.

However, the paper says homeowners missed out on a total of about $5.4 billion from 2008 to 2010 when rates fell from about 6.5 percent to 4.5 percent.

"People could have used that money to pay down other debts, used that money to purchase durable goods or used that money to simply balance their budget in others ways," Keys tells the Times.

Federal Housing Finance Agency Director Mel Watt says many homeowners are eligible for the government's Home Affordable Refinance Program (HARP), NPR reports.

Several million people have used the program to cut their mortgage payments an average of $200 a month, but another 800,000 are eligible but have yet to take advantage of HARP, Watt says. Many people think the program is too good to be true.

Quicken Loans Chief Economist Bob Walters tells NPR that many homeowners could not qualify for the program when it was launched five years ago. Many don't realize they may be eligible because of rule changes.

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