PROVO, Utah — If American homeowners had taken advantage of their ability to refinance, they’d have about $2,000 extra per year in their pockets — totaling $5.4 billion in potential savings — a new study finds.
Researchers at Brigham Young University (BYU) led the study, published in the Journal of Financial Economics.
For their data set, the BYU team, led by economics professor Jaren Pope, looked at a representative sample of one million mortgages from December 2010. They keyed in on specific details of the loans, such as payment history and interest rates, allowing them to conclude that 20% of those who should have refinanced in 2010 did not.
Even taking into account the potential risks inherent with refinancing, the average household stood to have saved $1,920 a year by doing so.
Interestingly enough, the researchers looked at the same sample two years later, in 2012, discovering that two-fifths of the 20% who should have refinanced, still hadn’t.
To Pope, this decision, or lack thereof, remains enigmatic.
“The question we had to ask at this point was why,” he says in a university release. “Why aren’t people taking advantage of the thousands of dollars they could be saving?”
Pope and his researchers teamed up with a non-profit to try and alert those who could take advantage of refinancing. Over 84% of those sent a letter did not reply, nor take action.
The researchers noted that homeowners who should have refinanced are often plagued by “behaviors like inattention and procrastination,” and usually are less educated.
That said, this segment also needs financial relief the most. Those struggling to make ends meet may ignore solutions that would save them money in the short-term, Pope et al. note.
“It’s not that people with less education don’t want to or know how to refinance, it just seems that refinancing isn’t the top priority when getting by is,” Pope says. “If you’re lower-income and you’re just struggling to make ends meet, you have even less time to pay attention to your mail.”
Fortunately, interest rates remain low, making a refinance still a viable option. The BYU researchers hope that those who could gain from a refinance take action, before it’s too late.
“When you learn that interest rates have come down, a couple of phone calls or internet searches may help to determine if a refinance would help put extra money in your pocket each month,” Pope suggests.