Failure to refinance

Households that fail to refinance their mortgage when interest rates decline lose out on substantial savings. Using a random sample of outstanding US mortgages in December 2010, we estimate that approximately 20% of unconstrained households for whom refinancing was optimal had not done so. The media...

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Bibliographic Details
Published in:Journal of financial economics 2016-12, Vol.122 (3), p.482-499
Main Authors: Keys, Benjamin J., Pope, Devin G., Pope, Jaren C.
Format: Article
Language:English
Subjects:
Behavioral economics
Household finance
Households
Interest rates
Mortgage market
Mortgages
Random number sampling
Refinancing
Studies
United States
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Summary:Households that fail to refinance their mortgage when interest rates decline lose out on substantial savings. Using a random sample of outstanding US mortgages in December 2010, we estimate that approximately 20% of unconstrained households for whom refinancing was optimal had not done so. The median household would save $160/month over the remaining life of the loan, for a total present-discounted value of forgone savings of $11,500, a particularly large consumer financial mistake. To shed light on possible mechanisms, we also provide results from a mail campaign targeted at a sample of homeowners who could benefit from refinancing.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2016.01.031