About one in five people who could have benefited by refinancing their mortgage after the financial crisis didn’t do it. The median amount of money they lost by sticking with their old mortgage was $11,500.
That’s according to an academic research paper that was awarded a $10,000 prize on Monday by CoreLogic, the real estate information company. The paper, “Failure to Refinance” (PDF), is by Benjamin Keys of the University of Chicago’s Harris School of Public Policy, Devin Pope of Chicago’s Booth School of Business, and Jaren Pope of Brigham Young University.
The authors took a random sample of 1.5 million mortgages on single-family homes as of December 2010, using data supplied by CoreLogic. Some people already had low-rate mortgages, so they wouldn’t have benefited from refinancing. Some were planning to move soon. Others had poor credit or a house that was worth less than its mortgage, so they couldn’t qualify for a new loan. But based on what they called “conservative” assumptions, the economists concluded that about 20 percent of the homeowners missed the chance to refinance for primarily psychological reasons, including “procrastination and inattention.” The median missed savings over the life of the loan came to about $45,000, which was equal in value to an immediate lump-sum payment of $11,500, the paper says.
Luckily for the people who didn’t take the opportunity to refinance, interest rates kept falling, giving them more time and even bigger potential savings. But by December 2012, 40 percent of the people who had been good prospects for refinancing in December 2010 still hadn’t done so, according to the paper.
The researchers found the same thing when they looked at the results of efforts by Neighborhood Housing Services of Chicago to encourage people to refinance. “We find that a large fraction of the households who received an offer to refinance did not take up this offer despite large savings, no out of pocket costs, and being eligible to do so with certainty,” they wrote. Their conclusion: “This is a particularly large household financial mistake.”
Maybe, the paper says, the answer is to take the decision out of homeowners’ hands: “To the extent that it is undesirable to reward only those households that are able to overcome the computational and behavioral barriers of the refinance process, policies such as an automatically-refinancing mortgage may be beneficial.”