With mortgage interest rates falling once again to near record lows, many homeowners will wonder if they should refinance their homes. They'll find many websites and other information sources that can be used to help make this decision, for example Zillow's refinance calculator. But even so, recent research suggests that homeowners are missing out on billions of dollars in potential savings.
In a recent working paper from the National Bureau of Economic Research, Benjamin Keys, Devin Pope, and Jaren Pope note that housing constitutes two-thirds of the wealth of the typical household, so decisions about mortgages "can have substantial long-term consequences for household wealth accumulation."
In particular, relatively small changes in the interest rate on mortgage loans can have a much larger impact on a household's monthly mortgage payments, and those changes can add up to considerable sums over a mortgage's typically long life.
Here's an example from the nontechnical summary of their research:
"... a household with a 30-year, fixed-rate mortgage of $200,000 at an interest rate of 6.5 percent that refinances when rates fall to 4.5 percent will save over $80,000 in interest payments over the life of the loan, even after accounting for typical refinancing costs. With long-term mortgage rates at roughly 3.35 percent, this same household would save roughly $130,000 over the life of the loan by refinancing."
But many households fail to take advantage of these savings. For example, in the period they study, December 2010, 20 percent of households that would have benefited from refinancing and had the ability to refinance did not do so. The median amount of unrealized savings was approximately $160 per month, or $11,500 per household over the remaining life of the loan. The total amount across all households was approximately $5.4 billion.
Why do so many households fail to take advantage of this opportunity? The authors suggest several reasons: lack of information about refinancing opportunities, the inability to properly evaluate options they do know about, procrastination and mistrust of the financial sector (which may have risen substantially because of the collapsed housing bubble and subsequent financial crisis).
If you're a homeowner with a mortgage, here's a simple lesson, one that could pay large dividends: Take some time to thoroughly investigate your refinancing opportunities. It could be more beneficial than you think.