Even though mortgage rates are near historic lows, many homeowners have yet to refinance their mortgages. Fannie Mae recently shared the results and analysis of a survey in a February 2014 publication titled, “What Motivates Borrowers to Refinance? Past Refinancing Behavior and Refinancing Intent.”
According to the data presented in the analysis, between 40 and 50 percent of borrowers have not refinanced the mortgage on their current homes. In fact, only 25 to 30 percent of borrowers say that they have refinanced in the last three years, even though mortgage rates have been so low.
So, why haven’t many borrowers refinanced? According to the data, and to other experts, many borrowers are reluctant to refinance because they are concerned that refinancing will result in longer loan terms and high closing costs, without reduce monthly payments enough to make the hassle worth it.
“When I meet with prospective clients for financial planning advice, I frequently discover they could potentially refinance to a lower rate, but they choose not to,” says William Pitney, a Certified Financial Planner and financial coach.
Understanding the reasons that homeowners are reluctant to refinance is the first step in overcoming their reluctance and helping them get into a position where they could save more money.
Longer Terms and High Closing Costs
One of the biggest issues with refinancing is the concern over the longer terms. The Fannie Mae report points out that many of those who have not refinanced their homes are younger, and inclined to own their homes for shorter periods of time. It might seem like a poor financial move to refinance to a longer mortgage term, and pay closing costs, when they might move before the interest savings make up for the loan fees.
Pitney has seen similar reluctance in his own clients. “A client might only have x number of years remaining, and don’t want to extend out the period any further,” he says. “They see ads and rates that promote repayments in the 15 to 30 year range, and become discouraged.”
Education is needed to help these borrowers understand that they can refinance to a 10 or 15 year loan, and that they need not extend the period. In some cases, if the interest savings are big enough, it’s possible to get a shorter-term loan for only a little more each month, resulting in bigger long-term savings and a faster pay off.
It’s also possible to avoid high closing costs. There are lenders that waive some refinancing loan fees, while other charge such low costs that you can recoup the fees within six months. This was the case when I refinanced my mortgage with Quicken Loans. It only took six months for the savings on my monthly payments to offset the fees associated with my refinance. Now my monthly cash flow is better, and I will save money in interest over the long haul. “Once clients speak with an independent mortgage professional, their perceptions of a refinance change,” says Pitney. “While the process still takes time, they often report being able to refinance with terms that they are happy with.”
What About the Hassle?
The Fannie Mae data reveals that some of those who haven’t refinanced their mortgages made attempts to do so, but were unsuccessful. Perhaps they didn’t have enough equity in their homes, or perhaps their credit had been destroyed in the aftermath of the financial crisis. Loss of income and lower home values have made it more difficult for some homeowners to refinance their mortgages.
Other homeowners are discouraged by these stories of unsuccessful refinancing attempts, while others cringe at the thought of the hassle. “There are those who just can’t be bothered with the whole refinancing process,” says Brian Koss, the EVP of Mortgage Network. “They don’t want to deal with the hassle and invasion.”
A refinance is another mortgage, so it often requires an appraisal, credit check, income verification, and other documentation that can be cumbersome to obtain. “As a whole, refinancing has become so overwhelmingly painful that it is a sort-of urban legend,” says Koss. “Friends and neighbors try to top one another with their horror stories.”
Once again, part of the solution lies in educating borrowers. While some borrowers won’t qualify because of how much negative equity they have in their homes, or due to abysmal credit ratings, there are a number of homeowners who could qualify, but they don’t realize it. You can also use a site like Quizzle.com to get personalized mortgage recommendations that can give you a good starting point.
“Some homeowners don’t realize they can refinance, even if the home is underwater,” says Koss. “There are refinancing programs that exist for those who have no equity.”
Programs like HARP are designed to streamline the process a little bit. An appraisal isn’t necessary with HARP, and borrowers can refinance even if they owe up to 125 percent of the value of the home. It might make sense to see if you qualify for HARP, since there are companies like Quicken Loans that will help you refinance in six to eight weeks, without the need for an appraisal and fewer hoops to jump through.
The Fannie Mae report suggests that borrower education about programs like HARP and combatting the horror stories about refinancing are needed in order to encourage more homeowners to refinance.
Rates will be rising again soon, and if borrowers don’t take advantage of their opportunities now, they may miss out on short-term cash flow improvement, as well as long-term interest savings.
Are you looking to refinance? Find out what you are qualified for by visiting Quizzle.com!