It's pretty easy to talk about the reasons to refinance. Save a bunch of money on interest, lower your mortgage payment or get cash out. It all sounds so good. But why do some people decide not to refinance when all the signals say they should?
Faculty from the University of Chicago and Brigham Young University set out to answer the question. The paper is "Failure to Refinance" and it won the Academic Research Council Excellence Award from CoreLogic.
The paper examines why as many as 20% of households fail to refinance even though it would be in their best interest to do so.
"A 30-year fixed mortgage of $200,000 at an interest rate of 6.5% who refinances when rates fall to 4.5% will save over $80,000 in interest payments over the life of the loan even after accounting for refinance transaction costs. When mortgage rates reached all time lows in late 2012 this household with a contract rate of 6.5% would save roughly $130,000 over the life of the loan by refinancing."
So what gives? These homeowners could have saved a lot of money but chose not to.
1. It's Hard to Calculate the Financial Benefit
Since many homeowners will only refinance a few times in their lives they are not familiar with this kind of transaction. On the surface it can seem really complicated.
What’s my break-even point?
How do I calculate the interest savings?
What’s my loan to value ratio?
Some of this stuff can be hard to figure out. Take your time and make sure to calculate if there is a financial benefit for you to refinance. Lenda will show you all your loan options and any costs associated with each loan. You can choose the loan that's best for you and complete your mortgage refinance online with Lenda.
2. The Financial Benefits Happen Over Time
We want it all and we want it right now. Instant gratification is very real. People would much rather think about winning the lottery over saving for the rest of their lives. It’s the way people are wired.
Some benefits of refinancing can be recognized right away in the form of a lower mortgage payment or cashing out equity. But the big savings on interest payments are recognized over the life of the loan.
Don’t let instant gratification stop you from making a smart financial decision. If the numbers make sense (see #1 above) then you should move forward with your refinance.
3. Costs of Refinancing Can Seem High
There is no such thing as a free home loan. There are fees and costs. The main consideration should be figuring those costs into your calculations to make sure you’re making the right choice.
Always calculate your breakeven point by taking the total costs and dividing it by the amount you'll be saving on your monthly mortgage payment. This simple calculation gives you the number of months it will take to recoup any costs of refinancing your home loan. If you're going to stay in the home for the long-term it's more likely you capture the savings.
Refinancing also takes up time. Spending your time on something does have a cost. With refinancing you have to gather documents and evaluate your entire financial situation. While not a monetary cost it can cost you some major time.
It’s a good idea to stay organized financially at all times. Not only to be prepared for emergencies but also to be ready for opportunities. If it’s a favorable time to refinance and you’re organized then it will be easier for you to move forward with the process.
4. The Refinancing Process Can Be Complicated
Getting a home loan can be complicated. Especially when you consider all the hoops you have to jump through since the housing collapse and financial crisis.
At Lenda, we think that refinancing your home loan should be simple. You have better things to do with your time and money than waste both on refinancing with old school banks.
Lenda provides a seamless mortgage refinancing process all online. No hassles. No paperwork. No telemarketing. See all your rates and see all the costs up front. Click here to get started.