Many homeowners show a reluctance toward refinancing, believing that some offers from banks may be “too good to be true.” But their suspicions may be costing them thousands of dollars in savings, according to a new study in the February Issue of The Review of Financial Studies from Columbia Business School researchers.
Fifty-one percent of 550,000 borrowers who were sent preapproval applications through the Home Affordable Refinance Program between November 2011 and March 2013 chose not to refinance their mortgages, even though there were no monetary costs for them to do so and they could have lowered their mortgage rate, the study showed. For those who did not apply, they may have missed out on nearly $9,000 in savings, according to the study.
Researchers Eric J. Johnson, Stephan Meier, and Olivier Toubia say that a separate survey of 4,000 homeowners showed banks’ motives consistently related to the probability of homeowners’ accepting a refinancing offer. Some financial institutions tried to help overcome some of borrowers’ hesitations, such as by offering $500 cash back rewards if the refinancing process took more than 30 days or by offering an immediate benefit for applying, like a gift card.
However, those interventions also failed to motivate borrowers to act.
“The findings highlight the important role of trust in financial decisions,” the authors note in the study.
Researchers say it could be that some homeowners may have ignored the offers in the mail. But “ignoring this one could be costly,” they note. “This failure to refinance is costly for society as well, since lower payments reduce defaults.”
Source: “What’s the Catch? Suspicion of Bank Motives and Sluggish Refinancing,” The Review of Financial Studies (February 2019)
