Millions of Homeowners Aren’t Refinancing, Despite Big Potential Savings. Here’s What’s Holding Them Back

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There are nearly 14 million homeowners in the U.S. right now who could save a significant amount of money by refinancing their mortgage. A majority of them, however, are passing on the opportunity due to hesitation about the process and whether it would be worthwhile.

Those concerns — about closing costs or the amount of paperwork involved — are valid, and may be true in some cases. “It is a very hard decision when it comes to investing in your mortgage and home,” says Zoey Cigar-Hodge, a mortgage expert at Better, a digital mortgage lender.

But seeing beyond these common objections could lead you to a significant savings opportunity, at a time when interest rates are low and home equity is rising quickly. If you’re on the fence about refinancing, one of the best ways to make the decision is to crunch the numbers yourself: how much you’ll save, how long it’ll take you to recoup the upfront costs, and whether the savings are worth the effort in your eyes. 

“It’s good to just do the math and figure it out yourself. Every situation is different,” says Katie Bossler, Quality Assurance Specialist at GreenPath Financial Wellness, a national nonprofit financial counseling agency.

Top 4 Reason Homeowners Haven’t Refinanced Yet 

A recent Bankrate survey shows there are four common reasons why homeowners decide not to refinance. Here’s a breakdown of each one, and how to overcome them.

1. A Refinance Won’t Provide Enough Savings to Warrant Doing One

The goal of refinancing your mortgage is ultimately to save money. By securing a lower interest rate, you can potentially lower your monthly mortgage payment. But some homeowners want to see a large amount of savings to justify the effort.

In this case, Cigar-Hodge suggests the homeowner takes a step to think about their financial goals, and how saving even a small amount might help accomplish them.

“It may not sound like a lot per month, but if you plan on being in this home for the full term, or even five years … it does make sense,” says Cigar-Hodge.

Pro Tip

Look beyond your monthly payment: There may be benefits to a refinance beyond simply decreasing your monthly bill.

Diana Rice-Wilkerson, a loan officer at Fairway Independent Mortgage, also urges clients to look beyond the monthly payment. If you’re refinancing to cash in on your home equity or to consolidate debt, that’s a big benefit too.

“While the payment may not change, they’re getting value out of the refinance,” Rice-Wilkerson says.

Here’s an example of what your savings could look like on an original 30-year mortgage amount of $215,000 at 3.9%, if after three years, you got a 30-year refinance with an interest rate of 3.5%. If you’ve been paying on the purchase loan for three years, the current balance would be roughly $202,627. With a small reduction in the interest rate, here’s what the savings would look like:

Loan A (current loan)Loan B (refinanced loan)
Loan balance: $202,627Loan balance: $202,627
Interest rate: 3.9%Interest rate: 3.5%
Monthly payment (principal and interest): $1,014Monthly payment (principal and interest): $909
Interest paid over the remaining 27 years of current loan: $124,955Interest paid over 30 years: $104,978

A $105 in monthly savings can help you get ahead on your emergency fund or free up cash to pay down high-interest debt. The trade-off is that instead of having 27 years left on the mortgage, you’re restarting at the full 30 years.

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2. Closing Costs and Fees Are Too Expensive With a Refinance 

Refinancing isn’t free. While the potential for savings is there, there is an upfront expense in the form of closing costs, just like there was when you first took out the mortgage. Sometimes it can seem like these closing costs are too high and outweigh the monthly savings.

You may be able to negotiate your closing costs, says Bossler. While it’s unlikely that your lender will completely waive them, there are some parts of the closing costs, like the origination fee, that could be negotiable. “Really advocate for yourself and ask the loan officer if any of those closing costs can be reduced,” she advises. 

Another option is to roll those costs into the loan itself, Rice-Wilkerson says. That means you wouldn’t have to bring any money to the table. However, this method comes with its own pros and cons and you may find that it’s not worth it once you crunch the numbers. 

Closing costs look different for each borrower, so it’s a good idea to explore your options with a professional. “The best practice is: get the numbers,” Rice-Wilkerson says.

Here’s an example, based on the loan from the above table, of how closing costs play into potential savings, which you can test for yourself using these mortgage and refinance calculators.

Loan A (current loan)Loan B (refinanced loan)
Loan balance: $202,627Loan balance: $202,627
Interest rate: 3.9%Interest rate: 3%
Monthly payment (principal and interest): $1,014Monthly payment (principal and interest): $854 
Closing costs: $3,500
Interest paid over the remaining 27 years of current loan: $124,955Interest paid over 30 years: $104,978
Potential savings (minus closing costs): $16,477

3. Too Much Paperwork Involved in a Refinance

It’s easy to feel overwhelmed by the logistics of refinancing. A lender might require lots of documents from you to prove your income and other financial information, and the very idea of providing all of that paperwork can be off-putting.

“Just making that point of sitting down and making those calls and submitting that paperwork, can be a barrier or roadblock for some people,” says Bossler.

But Rice-Wilkerson says for many lenders, all that’s required are a couple of pay-stubs and bank statements. “It’s not as much of a paper burden as people think,” she says.

Plus, the entire process can usually be done online. “One of the most beautiful things about the mortgage process today is that almost everything can be done electronically,” Rice-Wilkerson says. You’ll most likely be able to upload all of your documents in one place and sign everything electronically in a few minutes.

The process might be a little more complicated depending on your individual financial circumstances — if you’ve recently had a divorce or a bankruptcy, for example. But even so, Rice-Wilkerson says the amount of paperwork shouldn’t be overwhelming.

4. They Think Their Credit Score Isn’t High Enough to Qualify for a Refinance

Refinancing, like any type of borrowing, depends significantly on your credit score. Especially if your credit score has taken a beating during the pandemic, this might be a scary part of refinancing too.

But don’t count yourself out before exploring your options, Cigar-Hodge advises. Most lenders can offer a “soft-pull” on your credit report — which doesn’t hurt your score — and walk you through what you might qualify for without locking you into any commitments.

“If they feel like [their credit score is] not where they want it to be … We can run through those scenarios, too,” Cigar-Hodge says.

There’s also the possibility that refinancing can increase your credit score, especially if you use the new loan to consolidate your existing debts

“It’s good to know what your options are than to assume, ‘I’m not going to be eligible for anything,’”  Cigar-Hodge says.

If your credit score does end up being too low for a refinance, here are a few ways to work on increasing your score:

  • Pay your bills on time. If you feel comfortable with it, automatic billing can help make sure you don’t miss any of your payments.
  • Pay off any other existing debts. Consolidating or eliminating credit card or student loan debt can make a big impact on your overall score.
  • Keep an eye on your credit report. Make sure all of the information is accurate, and track your score as it changes over time.

When You Shouldn’t Refinance

There are lots of ways to overcome common barriers to refinancing and realize the savings that come with it. But sometimes, it really isn’t the best decision to refinance. Here’s when you should reconsider:

  • If you don’t plan to stay in the house long enough to recoup the closing costs. With the effects of the pandemic changing people’s living and working arrangements, many people are switching to a house that better fits their current needs, or even moving to a different city or country with a lower cost of living. If you plan to move in the near future, you may not come out ahead with a refinance because you won’t stay in the house long enough to recoup the closing costs with your monthly savings, says Bossler. 
  • If your current interest rate is low enough that you won’t see significant savings. While it’s true that even small savings can add up over time, it’s also important to remember that the smaller the monthly savings, the longer it’ll take you to recoup the upfront costs of refinancing. “You want to look at your existing loan to understand your existing terms,” Bossler recommends. “You may already have a pretty good rate. And if that’s the case, you know, it would take a long time to recoup those upfront fees,” she says. Waiting a long time to see a return on investment — and being tied to your current home for the duration — may not be worth it to you.
  • If you’re not in a position to qualify for the low rates right now. Even though rates are currently low across the board, you may not be able to get the low rates advertised if your credit score or debt-to-income ratio isn’t up to par. Many people had their finances take a hit during the pandemic, and it may take some time for them to recover. If you can’t qualify for a low refinance rate right now, “it might be something where you really want to pause for a moment and fix those underlying factors and then look to refinance once your credit has improved,” says Bossler.