By Alaina Tweddale for GOBankingRates
They say you have to spend money to save money, but when it comes to a mortgage loan refinance spending a little now could save tens of thousands of dollars over the life of the loan. Yet 20 percent of mortgage holders who could save big bucks by refinancing their mortgage aren’t taking advantage of lower rates according to an academic study, “Failure to Refinance.” The surprising truth is that many qualifying mortgage holders don’t refinance — even when doing so could save them tens of thousands of dollars over the lives of their loans.
Why Homeowners Put Off a Mortgage Loan Refinance
With so much money on the table, why aren’t homeowners refinancing their mortgage loans? A few years ago, three finance professors from University of Chicago and Brigham Young University wondered the same thing. Even though their data found that a qualifying mortgage holder paying a too-high interest rate would save around $45,000 over the life of their loan on average, many homeowners did nothing.
Today’s mortgage rates are even lower than when the “Failure to Refinance” study was conducted (4.69% in 2010 compared to around 3.8% for a 30-year FRM in January 2014 according to data from Sallie Mae) and qualifying guidelines are more lax, making it easier to get approved. Plus, home values have steadily improved, leading to 5.5 million homeowners regaining equity from 2009 to 2013, report CoreLogic. The academic research hasn’t been updated but I’d hazard to guess that today there are even a greater percentage of homeowners who can both qualify for and benefit from a mortgage loan refinance.
So, why aren’t homeowners refinancing? The reasons are surprisingly mundane.
- It’s a hassle: A mortgage loan refinance can be seen by some as a real chore and many simply don’t want to put in the work or might think refinancing a mortgage isn’t worth it. However, a $45,000 savings is worth a few hours of any homeowner’s time. Even if the process took five hours, that’s still a savings of $9,000 for each hour.
- Confusion about refinance savings: Figuring out the savings calculation can be a barrier — but there are plenty of online calculators that can help you figure your savings out, and it only takes a few minutes.
- Unaware of mortgage rates: Many homeowners don’t realize how substantial the cost savings can be over 30 or even 15 years. If you bought your home more than five years ago and don’t follow trends in mortgage rates, you may not know just how dramatically rates have dropped.
- Creditworthiness issues: Some don’t think they’d be approved for a mortgage refinance (after all, even Ben Bernanke’s been rejected for a refinance). However, government-backed mortgage giants Freddie and Fannie Mae loosened mortgage guidelines last year, making it easier for many more borrowers to qualify for home loans.
- Upfront closing costs: Shelling out the average $2,500 in closing costs for a mortgage refinance is a short-term burden that keeps many from realizing much larger long-term gains. There are lenders who will roll those closing costs into your loan but it’s better to shell the money out yourself, if you can. Otherwise, you’ll end up paying mortgage interest on your closing costs, essentially increasing the cost of your refinance.
How a Mortgage Loan Refinance Could Save You $45,000 or More
If the average amount saved with a mortgage loan refinance for qualifying mortgage holders is $45,000, what does that mean for everyone else? The researchers plotted the data to show that there are homeowners who would save less but there are also those who would save a lot more — up to a mind-blowing $150,000 over the life of a loan.
Where do you stand on the curve? To figure out how much you could save over the life of your mortgage loan by refinancing, you can use one of many online calculators and figure out your potential personal savings in minutes.
The median mortgage age is seven years, according to Freddie Mac, meaning the average mortgage originated when home loan rates were around 6.00%. Assuming your home is worth the nation’s average of $300,000, a refinance at today’s rates could save you over $37,000 in interest, when assuming an 80% loan-to-value ratio at home purchase and a 30-year fixed-rate mortgage.
Then, there’s the lower monthly loan payment. Because the refinanced mortgage loan is re-amortized over a new 30-year term and because the new rate is lower, the monthly payment drops. In this scenario, it dropped by a whopping $440 per month.
But if you kept payments the same and applied that extra $440 per month and apply it to your new mortgage payment and you’d shave 12.3 years off the term of your loan – while saving an additional $35,000 in interest payments. That’d put total interest savings over $70,000.
If you haven’t researched refinance rates in the past few years, you may be spending more money on your monthly mortgage than you have to. Maybe even a lot more. If you want to save some money or maybe even get out of debt faster, a mortgage refinance may just be worth looking into.
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