Millions of Americans are walking away from billions of dollars in savings every year.
How? By not refinancing.
While the refinance fad has faded since interest rates began rising this fall, millions of Americans still stand to benefit from a refinance. Quicken Loans estimates that at least 1.5 million people are missing out on $100 to $200 a month in savings by not refinancing their mortgages.
That’s about $2.5 billion in lost savings this year alone.
But there’s good news: Homeowners are being given a second chance to snap up those savings. Interest rates were rising steadily for a few weeks in August, but after the government shut down and the Federal Reserve decided to continue its economic stimulus plan (despite previous announcements that the plan would wind down sooner rather than later), interest rates dropped again and are still hovering close to 4 percent for a 30-year fixed-rate mortgage.
Historically, that is a low, low rate. If you took out a fixed-rate mortgage any time before mid-2011, chances are very good that your interest rate is higher than that. Just five years ago, interest rates were right at or above 6 percent, according to Freddie Mac.
That 2-percentage-point difference in the amount of interest you’ll pay can add up to tens of thousands of dollars—and that’s not pocket change. Yet some homeowners are willing to just hand that money over to the bank instead of refinancing.
“What’s interesting is we know a lot of these people religiously clip coupons to save 25 cents and yet they can save $100 or $200 a month and won’t do it,” Quicken Loans’ chief economist Bob Walters says.
Some homeowners aren’t rushing to refi for a number of reasons:
1. They don’t know what’s at stake.
“Awareness is part of it,” Walters said. “Some people are just not aware after all this time or they have tuned out what’s happening in the financial markets.”
Frequently, they don’t realize how much money is at stake. Yes, refinancing will take time and (usually) money. But for borrowers who can pay the upfront costs and keep them under $1,000, there’s little chance a refinance won’t be worthwhile.
“Find a trusted lender and have the conversation,” says Hale Walker, co-founder and senior vice president of residential mortgage lender Michigan Mutual. “That should cost you nothing to financially go through the process and find out exactly what it would cost and what the benefits would be cost.”
2. They’re gun-shy.
Of the people who are aware, some are just weary skeptics. They tried a few years ago and got the runaround dealing with disreputable characters offering everything under the sun, Walters said.
Many may be fatigued from trying with little success and are dismissive of the idea.
3. They may not have been eligible.
The steady rise of home prices this year has pulled a lot of homeowners out from underwater, freeing them to refinance. While homeowners with mortgages held by Fannie Mae or Freddie Mac were able to refinance while underwater through HARP 2.0, those with privately held mortgages typically were not given that same chance.
4. They don’t think it’s worth the hassle.
Some homeowners just look at the time and upfront expense and think that there’s no way it could be worth the trouble.
“When I’m taking a loan application, the amount of documentation I have to get from you is almost offensive,” Walker says. And if lenders aren’t being active and responsive in the process, that can lead to bigger headaches.
But lenders are loosening some standards and are learning the new government regulations as they attempt to streamline the process.
“It’s really a matter of taking a deep breath,” Walters said. “What’s the worst that can happen? You might miss the first half of your favorite sitcom–that’s all it takes to run the numbers and pull someone’s credit and take a look at this.”