Mar 17, 2015
Failing to refinance a home loan when interest rates fall can be a very costly mistake—tens of thousands of dollars in savings can be lost over the life of the loan. Yet about 20% of U.S. homeowners had fallen into this trap, according to a paper published this summer by the National Bureau of Economic Research.
The median total of lost savings for those who didn’t refinance was about $11,500 in present-value terms, the paper said (meaning actual losses over the life of the loan would amount to more than that). The Wall Street Journal spoke with Devin G. Pope, an associate professor at the University of Chicago Booth School of Business, one of the study’s three authors, about how to get more people to refinance their homes when interest rates fall.
Here is what Pope indicated — There can be real value in transferring money to homeowners as a way to stop the spiraling effect of foreclosures. Also, having people refinance their homes is a great way to put money in their pockets and stimulate the economy.
Yet if people are not refinancing, then it’s not completely working as a stimulus.” Pope continued: “We find some evidence that people with lower education and incomes are more likely to be in the group that is failing to refinance, which could indicate that financial savvy comes into play. There was also some evidence of procrastination.”
Source: The Wall Street Journal