With mortgage interest rates now substantially lower than they were one to one-and-a-half years ago, experts believe that millions of American homeowners can save a lot of money if they refinance. However, according to recent reports most consumers don’t even apply for refinancing even if they are eligible.
A statistical report from nonprofit organization Neighbor Works America shows that close to 20 percent of homeowners who are late on their home loan payments have mortgage interest rates that are equal to or greater than 8 percent. That is about twice the current average rate for 30-year fixed-rate mortgages on most popular surveys, and potentially a lot of consumers who could theoretically save a tidy amount of money by refinancing their mortgage.
Almost 770,000 Homeowners Qualify for HARP
In an effort to convince consumers to refinance and consequentially improve the timeliness of their payments, the Obama administration recently introduced new initiatives to stoke interest in refinancing through its existing schemes. The Federal Housing Finance Agency’s data, to illustrate an example, shows that almost 770,000 homeowners qualify for the Home Affordable Refinance Program, which, according to the agency, can save consumers about $200 per month or $2,400 per year on average.
Separately, mortgage analytics firm Black Knight Financial Services said that there are 7.4 million mortgage consumers whose interest rates are 4.5 percent or higher, and can also qualify for a refinance.
Many Potential Borrowers Sitting on the Fence
In a blog post, CNN Money sought to find out the reasons why consumers remain hesitant to refinance, and why they continue to, in colloquial terms, “sit the fence.” According to University of Chicago professor Benjamin Keys, it is a “complex decision” to refinance one’s home. Key and his fellow study authors from the University of Chicago and Brigham Young University wrote that borrowers tend to be skittish about refinancing due to the “horror stories” told by friends and neighbors who had previously refinanced.
In specific, previous refinance customers had found the process to be quite labyrinthine in nature, to say little of the time invested in such an effort. “Others,” added Neighbor Works America senior vice president Jeanne Fekade-Sellassie, “don’t believe they qualify.” That is why they decide to play it safe and not have to deal with the vagaries of change, given that they are currently making their payments on time and with little to no trouble.
Other factors listed by the above experts include the badgering nature of credit counselors who deal with borrowers who had been “in and out of default for years,” and the “unsympathetic” nature of lenders who tend to show little compassion, if at all, to the plight of struggling borrowers. But CNN Money believes that the potential stress involved in refinancing could be worth it if one considers the money that can be saved.
Using a simple example, a consumer who has a 30-year fixed mortgage valued at $200,000 and with a mortgage rate of 4 percent would save over $300 per month, as compared to a consumer with the same loan value, but an interest rate of 6.5 percent. Savings go up to $500 when dealing with consumers whose rates are at 8 percent.