Millions of homeowners are missing a huge opportunity to save money on their mortgages by refinancing, but until now, it wasn’t clear why so many people are sitting on the sidelines.
Some 32.4 million homeowners own a mortgage that charges a 0.75% higher rate than today's average home loan rate of 2.87%, according to Black Knight, a mortgage technology, data and analytics provider. That’s 3 out of every 4 borrowers with a 30-year mortgage.
Not all of those homeowners are eligible to refinance, but if we include only those with credit scores of at least 720—typically the minimum to qualify for the most competitive rates—that leaves 19.3 million homeowners who could refinance at today’s rates and save, which is a pretty large pool of refinance candidates.
What’s more, these homeowners could save an impressive $299 per month on average, Black Knight found. About 2.5 million of those borrowers could save at least $500 per month, which is about the cost of the average monthly car payment.
So why aren’t these homeowners rushing out to lock in a lower rate? A new survey by YouGov for Forbes Advisor suggests homeowners may not believe the savings are real.
Borrower Burnout Could Be Key
The No. 1 reason survey respondents said they have chosen not to refinance is that “they’re not sure it’s worth it.” Some 34% of survey respondents gave that answer.
There are many reasons why homeowners might feel refinancing isn’t worth it. Among them is “borrower burnout,” says Clifford Rossi, an executive-in-residence and professor of the practice at the Robert H. Smith School of Business at the University of Maryland.
As loans get older and borrowers have more exposure to lower rates, they are increasingly confronted with chances to refinance. So even though rates are scraping near record lows, those seasoned borrowers don’t want to go through refinancing again.
“Some people look at that one-quarter of a percentage point savings, and it’s just not worth it. Even if they can save a little bit of money and even get an appraisal waiver, they don’t want to go through all of the hassle and the paperwork that refinancing requires. This is the burnout,” Rossi says.
Why Getting a Mortgage May Be More Complicated
Borrowers also have had to deal with overloaded lenders who are facing twin tidal waves of forbearance requests and mortgage applications. In some cases, this has led to stalled applications, poor communication between lenders and borrowers, and even misinformation.
When Jaime Holland and her husband, Matthew Holland, started the refinance process, she said the hardest part was all of the hoops they had to jump through. First, the lenders wouldn’t disclose which credit reporting agency they were using (one agency showed a lower score for her husband, which would affect their rate).
But, as first-time refinancers, the part-time Tampa, Florida, couple found most unsettling was that closing costs seemed to rise as they went through the process.
“You’re given the out-of-pocket closing figure by your loan officer, but as you move through the process that figure becomes much higher,” Jaime Holland says. “It was worth taking the time to speak to several lenders and learn what we qualified for. Overall, refinancing into a lower rate saved us $200 per month. An added bonus is that we will be rid of (private mortgage insurance or PMI) much faster than with the original mortgage. But the intimidation factor is real.”
If dealing with lenders today feels disorganized or inefficient, that’s because it probably is, says Rossi. The pandemic has forced employers to quickly pivot from in-office operations to remote work, which has created a lot of friction points across the mortgage application process.
For borrowers, tenacity is the key.
“It’s a matter of people keeping after the loan officer. If you don’t hear from your loan officer for a week or so, call them. Loan officers get distracted; they have multiple applications,” Rossi says. “From a customer-friendly standpoint that doesn’t feel so good.”
Fees Are Too High, Homeowners Say
The YouGov survey found homeowners also worry any savings they might enjoy with a lower interest rate could be lost to lender fees. Sixteen percent of homeowners say they have chosen not to refinance because the fees are too high, the second most popular reason given on the YouGuv survey.
Homeowners are not wrong to be nervous about fees. Depending on your loan amount, the number of discount points you buy and what the lender charges, refinance fees can certainly rack up.
The average closing costs on a mortgage refinance are $5,000, according to Freddie Mac. And, in December, refinancing will get even more expensive, as the Federal Housing Finance Agency plans to tack on an adverse market refinance fee (0.50% of the loan amount) to loans sold to the government-supported entities Fannie Mae or Freddie Mac. That accounts for about 70% of all loans.
Whether homeowners choose to plunk down a few thousand dollars today to save money in the long run comes down to simple cost-benefit analysis. How much will it cost to refinance versus how much will you benefit? Figure out how long it will take to recoup those closing costs. If you plan on moving before you’ll see any savings, then refinancing probably doesn’t make sense.
One cost many homeowners are managing to avoid are appraisals. Appraisal waivers have gained popularity since the beginning of the year, shooting up by 110% since January. Home appraisal costs differ by area, but expect to save between $300 to $550 if you qualify for a waiver.
How to Lower Your Refinancing Costs
If you’re unsure whether refinancing is the best move, choosing a knowledgeable mortgage lender can help you decide, says Scott Lindner, national sales director for mortgage lending at TD Bank.
“A lender can help identify what kind of mortgage makes the most sense, taking into account how long the homeowner expects to reside in their home,” Lindner says. “They can help assess outstanding debts and their ability to manage a higher or lower monthly payment.”
Borrowers who are wary of high fees also should note that negotiating can help lower your costs and increase your savings. While many of the refinancing costs are fixed, such as taxes, pulling credit reports and flood certifications, there are some lender fees you can negotiate. Interest rates, application fees and perhaps even high origination fees (over 1%) can be negotiated.
You can also use loan estimates from competing lenders to ask for better deals. Borrowers in good positions to negotiate are those with a low-risk financial picture.
“When it comes to loan pricing and interest rates, mortgage lenders take into account things like credit score, income, assets, loan amount (compared to the value of the home), loan term and more,” Lindner says. “A borrower looking to secure the lowest rate or best pricing should look to strengthen their position in any of these areas.”
Homeowners Still Have Time to Take Advantage of Great Rates
About 15% of survey respondents said they were planning on refinancing their mortgages in the near future. For borrowers who are not quite ready to take the leap, experts say you still have time to snag a low rate.
“Mortgage forecasts generally suggest that mortgage rates will remain low into 2021,” says Danielle Hale, chief economist at Realtor.com. “If the economic activity and employment picks up at a significant pace over the next year, we may see some increases in mortgage rates.”
However, rates could sink lower if there are delays in fiscal stimulus or a vaccine development. Economic influences such as high unemployment rates and sinking U.S. Treasury yields can also put downward pressure on rates.
“An unfavorable election outcome and limited success or distribution of vaccines are some factors that can hold interest rates at current levels or push them down further,” says Scott Verlander, senior vice president, head of retail and affiliate banking at TIAA Bank.“An unfavorable epidemiological path on Covid combined with insufficient fiscal stimulus can influence further declines in consumer and corporate finances.”
But experts like Verlander recommend locking in a low rate now if it makes financial sense. Waiting for rates to fall lower in order to save a few more dollars could backfire as there’s no clear indication where rates are headed. If they start rising, then homeowners could end up missing their chance to save.
If You Want To Refinance, Start By Doing Your Homework
Jaime Holland began her refinancing journey by reading an article about refinancing online. At the time she was locked into a 5% interest rate and knew she could do better, but wasn’t totally sure about the process. She describes her path to refinancing as an exercise in trial-and-error.
The first lender she contacted was standoffish after Holland went through the process of giving her their information. The lender ultimately stopped returning her calls. The couple also contacted banks where they had accounts, but those banks couldn’t match a quote she got from an online lender. She went with the new (to them) online lender who offered the lowest fees, best interest rates and most helpful customer service.
“I got flyers in the mail from different lenders and did some reviews research, and that’s how I found the lender we ended up going with. I liked what I saw, so that’s why I contacted them,” Jaime Holland says.
Choosing a lender you trust and are comfortable working with is key to having a good experience that yields positive results. Part of the process is asking questions and gathering information, including:
- Asking your friends and co-workers for lender recommendations
- Reading lender reviews
- Visiting lender websites and getting a feel for what you’re comfortable with; you might, for example, need a more hands-on lender than someone who wants to do everything online
Another important consideration is the kind of lender you choose. A mortgage broker, for example, can offer their customers several loan options. This can be convenient as it takes the burden of comparison shopping off the borrower. However, mortgage brokers are also working for many banks and juggling a lot of information, which can get confusing, Rossi says.
For borrowers who are new to the refinance process, a better option might be a retail bank, such as a Bank of America or Chase, where all of the information is streamlined.
“If a borrower goes directly to a branch office and says ‘I want to fill out a mortgage application,’ they’ll work directly with that bank. That’s a direct-to-consumer relationship,” Rossi says. “That’s the retail channel and it’s least prone to some of the bad information borrowers complain about.”
But before you begin a lender search, get a good idea of what you can afford to spend and what you need to save before you refinance. Use our refinance calculator to run a few interest rate scenarios.
Methodology
This study was conducted for Forbes Advisor by YouGov. The total unweighted sample size for this survey was 1,363 U.S. adults, 427 of which own their main home with a mortgage. Results are weighted to be representative of all U.S. adults (ages 18+). The survey was conducted online Oct. 5 to 6, 2020.
