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 — from Black Knight’s November 2015 mortgage monitor — 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 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 — 100 basis points equals 1 percentage point — matter when you are 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 difference of 75 basis 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%.
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States where homeowners could see the highest savings include California, New York and Hawaii — all would see monthly savings of $300 or more after refinancing, according to the Black Knight report.
So why with rates so low for so long are there still millions of homeowners who haven’t taken advantage of refinancing? Here’s a look at some of the challenges consumers face and some ways to improve your chances of qualifying for refinancing at a lower interest rate.
Lower credit scores and income. Homeowners whose credit or income have deteriorated since they took out their mortgage may not be able to qualify for today’s 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. Many lenders will 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 costs.
Not enough equity. The U.S. median home price still hasn’t topped what it was at its high point in 2006, before the Great Recession. Lenders generally won’t consider applications to refinance from those who don’t 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. To get the best rates, lenders favor applicants who show a stable job for at least the past few years.
Lack of assets. Lenders like to see cash and other assets available to pay the mortgage in case you lose your job. If you’re living paycheck to paycheck and have high credit card balances, chances are you won’t 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’t qualify for the above reasons, here are some steps you can take.
Boost your credit score. Check out these NerdWallet resources to get started.
Look into FHA loans. These government-backed mortgages are available to people with tarnished credit. The federal HARP program is another option to explore if you are short on equity or have less than excellent credit.
Consider rolling in closing costs. 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. If your income or assets are insufficient to qualify for refinancing, you may be able to piggyback on a loved one’s credit history. You would both be responsible for the loan, and the house would serve as collateral.
Kamran Rosen is a data analyst at NerdWallet, a personal finance website. Email: firstname.lastname@example.org.
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