Should I Ignore Refinancing Offers?

If you've been ignoring offers to refinance your mortgage, then you aren't alone. Many homeowners fail to refinance their loan, even though doing so could save them significant money by reducing their interest rate. In fact, researchers at Columbia Business School found that the majority of homeowners who received refinancing preapproval applications through the Home Affordable Refinance Program chose not to apply. How much did this decision cost them? According to the article, approximately $9,000 in interest savings!

The study, titled "What’s the Catch? Suspicion of Bank Motives and Sluggish Refinancing", was recently published in The Review of Financial Studies. It reviewed the outcomes of preapproval applications for 550,000 borrowers who received them between November 2011 through March 2013. Although the refinancing was offered at no monetary cost and would have lowered their mortgage interest rate, 51% of homeowners chose to ignore or decline the application.

Why did buyers pass up this opportunity? As shown by a separate survey, the answer essentially boils down to the belief that such a deal must be too good to be true. The survey of 4,000 homeowners showed that a mistrust of banks’ motives was the factor which consistently related to declining the chance to refinance. In fact, even when banks attempted to further incentivize refinancing by offering a gift card or similar reward, buyers still failed to apply.

The results of these investigations leave us with two important lessons: first, the opportunity to refinance should never be ignored; second, as a borrower, you might not want to be overly suspicious of a good offer from a legitimate bank. Of course, depending on your current interest rate, not everyone will be able to save money by refinancing, but the potential for savings makes it something that should always be considered!

You can read more about this study by checking out this article from Realtor Magazine.