I know that it is hard to engage students about mortgages or explain how or why to refinance, so I file this post under:  a reminder that the world is messy and we are not the economically rational beings always acting in our best interest.  Fascinating paper studied why mortgage holders who would have benefited from a refinance at lower interest rate chose not to.  This chart tells the story by graphically displaying the value of savings that households were giving up by not refinancing…yes, at the far end of the tail is $100,000+ that could have been saved over the life of the loan:

So, why don’t people take advantage of this low-hanging fruit?

The researchers note in their paper that the results “are consistent with both behavioral explanations such as procrastination and inattention, as well as lack of information as possible reasons why households fail to respond to offers that appear to be in their financial best interest.”

Lack of trust in the system may have played a role:

A 2013 study from Fannie Mae asked eligible borrowers why they did not refinance under HARP: 22 percent said they they did not trust the lender who contacted them, and 18 percent said they didn’t know they qualified.

How about fear?

“A lot of homeowners that we communicate with on this issue sort of have just held their eyes to the ground, and have said, ‘I’m going to do whatever I need to do to make my payments monthly.”

Ultimately, with the family that the article focused on, it was a trusted community partner to walk them through the process:

Elliott Torres had briefly looked into refinancing in the past, but he always seemed to hit roadblocks. Paperwork. Something about his credit history. Something about his savings. The offer from NHS promised to walk him through the whole process. Torres wondered what the catch was.

There was no catch. Two weeks later, they were all set. Back in 2000, when they had bought the house, interest rates were hovering around 8 percent. Their new interest rate? Four percent. Torres says the refinance saves the family around $400 a month. They can afford a second cellphone for Juanita now, instead of having to share one.

Lack of trust, inertia, fear and a confusing process all contribute to billions of dollars that could be in consumer’s pockets.  Aside from in-person counseling, I wonder who can figure out a more scalable solution.  Ideas?

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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