Despite the fact that mortgage interest rates have been historically low for the past three years, nearly half of homeowners who are eligible for lower rates have not refinanced, according to research conducted by Fannie Mae.
To find out why, the company's Economic & Strategic Research Group conducted two separate analyses, primarily based on Fannie Mae's National Housing Survey data collected over a three-month period from January 2013 to March 2013.
First, the group examined what factors were associated with having refinanced in the past. Second, it studied the factors that motivate one's intent to refinance over the next 12 months. Those findings have been packaged into a report titled "What Motivates Borrowers to Refinance?"
As per the research – which was highlighted recently in Fannie Mae's blog by Li-Ning Huang, Ph.D., senior manager of the Economic & Strategic Research Group – there are a variety of factors that predicate whether a homeowner is inclined to refinance, including lifecycle (age, marital status, education level, income, children in home, years in home); opportunity (perceived ease of getting a mortgage, whether rates are forecast to decline, stabilize or rise); and risk mitigation (stress over payments, concern about job loss, prior failure to get a loan, underwater status, doubt about wisdom of homeownership, expectation of improving finances).
According to the research, the number of years a borrower has owned his or her home is a primary factor that determines the likelihood to refinance. Most respondents had refinanced after six to 15 years. That means "new" homeowners are many times less likely to refinance, regardless of their situation.
Homeowners who are married and have higher education levels are also more inclined to refinance – as are homeowners who are more aware of their financial situation, which generally correlates to higher education, the research finds.
Of course, whether mortgage interest rates are rising, declining or stabilizing is also a primary factor – but the research takes that a step further by analyzing the attitudinal and behavioral reasons why some homeowners are quick to seize lower rates while others are not. For example, some homeowners cited ‘not enough savings’ and ‘high closing costs’ as reasons why they might not refinance, despite record-low rates. Some simply don't try out of fear they will be declined.
Situational factors – such as how long the homeowner expects to remain in the home – are also major drivers of the decision whether to refinance, the research finds.
One factor that is surprisingly absent from the research is whether homeowners feel they have the time and energy to go through the refinancing process. In some cases, it could simply be that homeowners' busy work schedules – and the perceived hassle of going through the refinancing process – are causing many to shy away from, or indefinitely postpone, a refinancing – this, despite the fact that they are aware of the potential savings to be realized.
Of the 1,322 survey respondents who were asked, ‘Have you ever refinanced the mortgage on your current home?’ 45% said they had not, while 56% said they had. Of the 785 respondents who had not refinanced, when asked, ‘How likely are you to refinance the mortgage on your primary home in the next 12 months?’ only 10% said they were ‘very likely to refinance’ while the remaining 90% said they were not very likely to refinance.
Interestingly, research conducted by the Federal Reserve in 2001 reveals similar findings: Even 13 years ago, nearly half of homeowners who could have refinanced their mortgage at a lower rate didn't bother to do so.
To download a copy of the report, click here.