Homeowners are losing $13 billion a year by not refinancing their mortgages
American homeowners are missing out on at least $13 billion a year by not refinancing their mortgages, according to a NerdWallet analysis of mortgage loan data from Black Knight Financial Services.
Our analysis of the data 鈥� from Black Knight鈥檚聽聽鈥� shows that at least 5.2 million homeowners with good credit and equity in their property could save an average of $215 each month by refinancing. We calculated聽the national savings total by multiplying average savings by the number of qualified borrowers.
The total savings could be even higher than $13 billion. The Black Knight report used a refinance rate of 4.71%, which is 114 basis points above the Jan. 18, 2016, rate of 3.57%. Basis points 鈥� 100 basis points equals 1 percentage point 鈥� matter when you are聽refinancing.
1% rule is changing
In the past, homeowners refinanced if they could get a new rate at least 1-2%, or 100-200 basis points, lower than their original interest rate. But many borrowers can see substantial savings by refinancing at an interest rate聽difference of 75聽basis聽points, or less than 1%, even when taking into account closing costs.
Mortgage refinancing has seen strong momentum in the past few years, as borrowers looked to take advantage of interest rates that fell from an average of 6.03% in 2008 to a low of 3.35% in December 2012 and have not climbed much since. Refinanced loans made up over 70% of all mortgage applications from 2010 to 2013, which has driven down the average outstanding interest rate for all U.S. mortgages to 3.84%. 聽
States where homeowners聽could see the highest聽savings include California, New York and Hawaii 鈥� all would see聽monthly savings of $300 or more after refinancing, according to the Black Knight report.
Refinancing roadblocks
So why with rates so low for so long are there still millions of homeowners who haven鈥檛 taken advantage of refinancing? Here鈥檚 a look at some of the challenges consumers face聽and some ways to improve your chances of qualifying for refinancing at a lower interest rate.聽
Lower credit scores and income.聽Homeowners whose credit or income have deteriorated since they took out their mortgage may not be able to qualify for today鈥檚 lower rates. (The Black Knight study looked only at people with over 20% equity in their homes and credit scores over 720.)
Hassle and upfront expense.聽Many lenders will聽make homeowners seeking a refinance jump through a lot of hoops, including mountains of paperwork. The credit score site MyFico.com estimates that a $200,000 refinance comes with $5,600 in closing聽costs.
Not enough equity.聽The U.S. median home price still hasn鈥檛 topped what it was at its high point in 2006, before the Great Recession. Lenders generally won鈥檛 consider applications to refinance from those who don鈥檛 have at least 20% equity in their property. Homeowners who took out second mortgages and used up their equity may find that they cannot qualify to refinance.
Inconsistent job history.聽To get the best rates, lenders favor applicants who show a stable job for at least the past few years.
Lack of assets.聽Lenders like to see cash and other assets available to pay the mortgage in case you lose your job. If you鈥檙e living paycheck to paycheck and have high credit card balances, chances are you won鈥檛 be able to get a lower rate or, in some cases, even qualify for refinancing.
How to improve your chances
The good news: Even though the Federal Reserve has started raising interest rates, they are still quite low. If you can鈥檛 qualify for the above reasons, here聽are some steps you can take.
Boost your credit score.聽Check out these聽聽to get started.
Look into聽. These government-backed mortgages are available to people with tarnished credit. The federal聽聽is another option to explore if you are short on equity or have less than excellent credit.
Consider rolling in closing costs.聽Most lenders allow you to include closing costs in your new loan, but be sure to calculate how long it will take to break even.
Enlist a co-borrower.聽If your income or assets are insufficient to qualify for refinancing, you may be able to piggyback on a loved one鈥檚 credit history. You would both be responsible for the loan, and the house would serve as collateral.
If you鈥檙e considering refinancing,聽, figure out how to, and be sure to shop at聽.
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Kamran Rosen is a data analyst at NerdWallet, a personal finance website. Email:聽kamran@nerdwallet.com.
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