5 reasons people don’t refinance
by Tim Manni
There are millions of homeowners out there who have already refinanced their mortgages. Some are even considering refinancing for a second time. However, it may surprise you that there are still many borrowers out there who haven’t refinanced. Here are five reasons why:
1. Small Loan Amount
With a small loan amount, it can be hard to achieve enough savings by refinancing to make the transaction worthwhile. For example, refinancing a $750,000 loan from 5.5 percent to 4.5 percent can yield a monthly savings of almost $460 per month, but the savings for a $75,000 loan only amount to about $46 per month. Also, lenders often tack on additional fees or interest rate premiums for small loan amounts, so it’s more difficult for you to get a rock-bottom mortgage rate.
2. Short Time Frame
The relatively high costs of refinancing need to be recaptured though interest savings, which can take a while. If you have just a few years before you expect to move or even refinance again, you might never reach that savings point. While there are ways to refinance and save some money even if you have a short time frame (such as a “no-cost” refinance), the increase in interest rate by this method can seriously reduce the benefits.
3. Small Rate Differential
There’s no doubt that having a high loan amount can produce a refinance windfall; it’s also true that having a substantial change in your interest rate matters at least as much. Over the long run, it is possible to refinance with only a slight rate change and save money, but it’s a painfully slow process. Given today’s low mortgage rates, you can shoot for an interest rate difference of just 1 percent and still save substantially. However, for some borrowers, this doesn’t seem to be enough of a gap, since there are still many, many loans in place today with rates below 6 percent which might be eligible to be refinanced but aren’t for some reason. This is probably due to a combination of small interest rate differential, small loan amount, short time horizon or a lack of cash.
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