Don't Be Afraid to Refinance Your Loan

Homeowners consistently fail to refinance their mortgages, even when doing so could save them thousands of dollars in interest. This is the finding made by researchers at Columbia Business School whose work was recently published in The Review of Financial Studies. After examining mortgage refinancing data from November 2011 through March 2013, the researchers determined that 51% of homeowners who received preapproval applications through the Home Affordable Refinance Program chose not to apply, a decision which cost them each nearly $9,000 in savings.

The study, titled "What’s the Catch? Suspicion of Bank Motives and Sluggish Refinancing", reviewed the outcome of the preapproval applications for the 550,000 borrowers who received them during the 17-month time period. Although the refinancing was offered at no monetary cost and would have lowered their mortgage interest rate, the majority of homeowners chose to ignore or decline the application.

Why did buyers pass up this opportunity? As shown by a separate survey, the answer essentially boils down to the belief that such a deal must be too good to be true. The survey of 4,000 homeowners showed that a mistrust of banks’ motives was the factor which consistently related to declining the chance to refinance. In fact, even when banks attempted to further incentivize refinancing by offering a gift card or similar reward, buyers still failed to apply.

The results of these investigations leave us with two important lessons: first, the opportunity to refinance should never be ignored; second, as a borrower, you might not want to be overly suspicious of a good offer from a legitimate bank.

Source: "Study: Reluctant Refinancers Missed Out on Saving Thousands"