US Homeowners Leave Money on the Table

Homeowners who successfully refinance their mortgages can save tens of thousands of dollars over the course of their loans, money that can be used for investment or other living expenses. Unfortunately, a significant number of Americans who would qualify for new mortgages at lower interest rates simply don’t act, and that inertia is costing them money.

Chicago Booth’s Devin G. Pope, examining a random sampling of US mortgages from December 2010, finds that approximately 20 percent of households who would benefit from refinancing, and who appeared able to refinance, simply did not. He estimates that these households lost an average $11,500 through inaction.

“The savings for each household we studied would be significant,” Pope says. “Unfortunately, we find that less financially savvy households, those that have less wealth and less education, are the ones who are more likely not to refinance, and lose out on savings.”

Pope and his coauthors, Benjamin J. Keys of the University of Chicago Harris School of Public Policy and Jaren C. Pope of Brigham Young University, analyzed approximately 1 million mortgage loans that were active in 2010, representing about 85 percent of the mortgage market. They culled the data to find the homeowners who would save money through refinancing, and who would likely qualify for a new loan, based on credit scores, payment histories, and loan-to-value ratios on all housing liens. They merged this information with 2010 census data that include average income and education levels, and added housing-price data to the mix.

To understand why homeowners failed to refinance, the researchers partnered with the nonprofit organization Neighborhood Housing Services of Chicago (NHS), which acts as a mortgage lender for lower-income communities. NHS actively encourages its clients to refinance when interest rates drop.

In July 2011, NHS sent letters to 446 households whose mortgages it services, providing details of a preapproved offer to refinance at a lower interest rate of 4.7 percent, with no money up front. Some 84 percent of the homeowners who received the letter did not respond. As interest rates declined further, NHS sent another letter in 2012, offering an even lower rate of 3.99 percent to 140 households, and more than 75 percent did not respond. Finally, in May 2013, the nonprofit sent a letter offering a mortgage with a four percent interest rate to 193 eligible households—and still 87 percent failed to respond.

After the third offer, Pope and his fellow researchers conducted a short phone survey to find out why the response rate was so low, to which 32 of the households that did not refinance responded. “The results suggest that up to one-quarter of the households never even opened the letter,” Pope says. “Interestingly, about one-third of those who did read the letter did not act because they didn’t think there were enough savings to make it worthwhile, while another third indicated they just never got around to calling.”

The researchers suggest that many homeowners do not refinance because of procrastination, while others simply do not understand this complex financial transaction. Similarly, the researchers propose that some of these same mortgage holders see only the upfront expenses associated with refinancing, such as closing costs, and do not recognize the significantly larger long-term savings.

One way to ensure that all homeowners save money would be to require mortgages with fixed interest rates to automatically adjust downward when rates decline, Pope says. “Of course, realistically, that would have to be government mandated—it is unlikely that banks are going to give up the profits from higher-rate mortgages voluntarily.” Households lost significant wealth during the recession; by failing to take advantage of opportunities such as the federal Home Affordable Refinance Program, they’re missing the chance to get some of that money back.