Many homeowners will be wondering if it is worth refinancing their home, as mortgage interest rates have fallen to record lows. There are many websites and information resources that can help homeowners make this decision. For example, Zillow's refinance calculator. Recent research shows that homeowners could be missing out on huge savings of billions of dollars.
A recent work paper by the National Bureau of Economic Research shows that two-thirds of the household's wealth is in housing. Therefore, decisions regarding mortgages can have significant long-term effects on household wealth accumulation.
Particularly, small changes in interest rates on mortgage loans can have a greater impact on monthly mortgage payments. These changes can add up over the mortgage's usually long life.
Here's an example taken from their non-technical summary:
"... A household with a $200,000 30-year fixed-rate mortgage at 6.5 percent. Refinances at 4.5 percent or lower will save $80,000 over the loan's life. Refinancing would result in a household saving approximately $130,000 with long-term mortgage rates of 3.35 percent.
Many households don't take advantage of these savings. In their study, December 2010, for example, 20 percent of households who would have benefitted from refinancing had they been able to do so. The median amount of savings not realized was $160 per month or $11,500 per household for the remainder of the loan's life. The sum total of all household savings was about $5.4 billion.
This is why so many households miss out on this opportunity. There are several reasons why so many households fail to take advantage of this opportunity. These include a lack of information on refinancing options, inability to properly assess the options they know, procrastination, and mistrust of financial services (which may have increased as a result of the collapsed housing market and subsequent financial crisis).
Here's a simple tip for homeowners with mortgages: Make sure you thoroughly research your refinancing options. You might be more benefited than you realize.
