Why many homeowners still haven’t refinanced
Record-low mortgage rates have led to a refinancing boom unlike any other in American history, but according to new Bankrate data, a surprising number of homeowners are missing out on the opportunity to save. More than a quarter of current mortgage holders (27%) don't even know their current rate, putting themselves in a poor position to determine if it's worth it to refinance.
"Millions of homeowners could be missing out on tens of thousands of dollars in savings by not refinancing their mortgages at this year's record low rates," says Greg McBride, Bankrate chief financial analyst. "Roughly 8 in 10 homeowners with a mortgage have not refinanced and more than 1-in-4 doesn't even know what rate they're paying."
The nationwide survey showed that 17% of mortgage borrowers say they have refinanced this year, an additional 27% have considered refinancing but haven't done so, and 52% have not considered refinancing. This means that despite the ongoing record low mortgage rates, 80% of mortgage borrowers have not refinanced. To be sure, some of these homeowners aren't eligible for refinancing or have other compelling reasons not to refinance.
Key takeaways:
• Homeowners cited numerous reasons for not refinancing, but lack of enough savings to cover the costs of the refi was the biggest stated hindrance.
• Millennials were more apt to refinance than baby boomers or Gen-Xers and lower-income borrowers have the highest interest rates.
• The new FHFA refinance fee set to begin Dec. 1 was a big turn-off for prospective refinancers.
Why homeowners haven't refinanced their mortgage
Homeowners cited a number of reasons for choosing not to refinance. Here are the main ones. Advice on how to address these obstacles follows below.
• It wouldn't save me enough money (33%)
• Closing costs and fees that are too high (23%)
• Too much paperwork and hassle (22%)
• Plans to move or pay off the loan soon (14%)
• Low credit score (10%)
• Unemployment or reduced income that would prevent qualifying (6%)
Millennials were more likely than baby boomers and Gen X-ers to cite closing costs and fees or paperwork as their major barriers. Homeowners could cite multiple reasons for not refinancing, and 17% chose reasons other than those listed above.
Although higher-income households are more typically likely to have better rates on their existing mortgages, they were also more likely to want to refinance: 49% of households earning more than $50,000 responded that they considered refinancing, compared with just 37% of those earning less than $50,000.
As earnings went up, middling savings on their mortgage payment became a bigger deterrent to refinancing. Higher-income households that didn't refinance were more likely to say it wouldn't save them enough money (39% of those earning $80,000 or more and 33% of those earning $50,000-$79,999) than households with income below $50,000 annually (52%).
Households with annual income below $50,000 were more likely to cite a low credit score (32%) as a reason for not refinancing than homeowners with income of $50,000-$79,999 (13%) and $80,000 or higher (7%).
Millennials most likely to refinance
Although the homeownership rate for millennials is lower than that of older generations, millennials who do own homes were more likely to refinance their mortgages this year than baby boomers or Gen X-ers.
According to Bankrate's survey, 21% of millennial homeowners refinanced their mortgages this year, compared with 16% of Gen X-ers and just 14% of baby boomers. The discrepancy may be partly due to the fact that boomers are most likely nearer to the end of their mortgage terms.
Many boomers have probably paid their mortgages down to the point where the savings from a refi can't be recouped versus the expenses within a reasonable period of time.
Regardless of their age, lower-income borrowers generally reported a higher median mortgage rate, with households earning less than $30,000 annually reporting a median rate of 4.5% and households earning $30,000-$49,999 annually a median of 4.09%, compared to 3.81% for households with annual income of $50,000-$79,999 and 3.63% for households with annual income of $80,000 or more.
Adverse market refi fee rankles homeowners
A quick recap: Most conforming mortgage refinances valued at $125,000 or more will be assessed a 0.5% fee if they close on or after Dec. 1, thanks to a new Federal Housing Finance Agency (FHFA) rule. Lenders have already started pricing this cost into their loan offers.
A majority of respondents said the fee was deterring them from pursuing a new mortgage. More than half of baby boomer and Gen X homeowners said the fee was a significant factor in their decision to not refinance. Millennials were less likely than older homeowners to be turned off by the FHFA fee.
While it's true that the fee will make refinancing more expensive overall, many homeowners still stand to see significant savings even after it comes into effect, because that 0.5% is being added to interest rates that are otherwise historically low.