Even in these near-historic times we’re living in, millions of people continue to cling to their high interest rate mortgages. Why are so many failing to capitalize on the low rates that may not be around much longer? Is it just inertia?
Refinances Falling Flat (Sort of)
According to the latest CoreLogic MarketPulse issue, there’s something more at play. Within that online publication, economist Molly Boesel peers into the minds of borrowers holding fast to their old loans.
Even though in many cases a refi appears to be — on paper at least — a clear victory for the homeowner, Boesel found that a surprising number of borrowers may be abstaining from refinancing because they can’t or it may not even be worth it.
Looking specifically at outstanding mortgages (as of May 2016), Boesel discovered that more than 40 percent of these loans had rates of 4.38 percent or above. That’s approximately 100 basis points above the interest rates at that time (again, as of May 2016), a circumstance that’s generally regarded as a good time to refinance.
About 18 percent of all mortgages that Boesel studied had rates between 4.38 percent and five percent. If the circumstances were supposedly so ripe for a refi, why were so few actually following through with it?
Behind on Payments
First, Boesel found that many of these mortgage holders were significantly behind on their loans. Only two percent of low interest rate mortgages are “seriously delinquent,” but that number jumps up to 12 percent for loans with rates at seven percent or above. When these mortgage holders get 90 days or more behind, it would be extremely unlikely that they would qualify for a refi.
Even mortgage holders who aren’t behind on their high rate loans can face barriers when considering a refinance. Up to 50 percent of mortgages with 5 percent and above rates have gone into 30-day delinquency at some point. The higher the rate, the more likely it is that the borrower went into delinquency sometime. Only 10 percent of those with low rate loans (under five percent) have ever fallen behind by 30 days or more.
Falling into delinquency may be enough to prevent a borrower from qualifying for a refi rate low enough to justify getting a new mortgage. Their bad credit rating makes getting a new mortgage financially pointless.
If you’ve been scratching your head about why so few people seem to be taking advantage of the historically low interest rates, you may have your answers.
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