Owners continue to benefit from low interest rates in 2020 and 2021 to refinance their home and reduce their monthly mortgage payments. However, not all income groups were able to take advantage of these low rates to refinance and improve their financial situation.
Between February and June 2020, compared to low-income refinancers, high-income refinancers were able to save ten times more than before the pandemic, according to a Federal Deposit Insurance Corporation (FDIC) and Center for Financial Research (CFR) analysis of data on refinancing requests and financing rates. High income refinancers have seen a significant increase in refinancing activity compared to low income refinancers.
By analyzing the rates of COVID-19 cases in postal codes over time, the FDIC and CFR found that 74% of the increase in refinancing inequalities the changes were due to local economic conditions triggered by the pandemic. For example, low-income homeowners were more likely to experience the brunt of the pandemic-related job losses, and therefore were less able to receive refinancing approval.
In 2020, the share of low income homeowners refinanced edged up from 1.1% to 2.4%. At the same time, the share of high income homeowners who refinanced increased significantly, from 1.1% to more than 9.0%.
Before 2020, low-income refinancers enjoyed a 1.7 percentage point reduction in mortgage interest rates, conditional on refinancing. Fast forward to 2020, this reduction reached 1.8 percentage points in 2020, a minor improvement.
In contrast, high-income refinancers who refinanced their mortgages received cuts of just 1.5 percentage points before the pandemic and an average reduction of 1.9 percentage points in 2020, translating into greater savings. .
It is evident that there is a large income gap in refinancing. The under-representation of low-income refinancers in 2020 is due to a combination of factors, including:
- lenders prioritize homeowners high real estate stocks, which are more profitable because they produce higher costs;
- pandemic job losses having a greater impact on low-income refinancers, thereby affecting credit and their ability to qualify for refinancing; and
- low income refinancers showing financial literacy leading them to inaction, especially in an environment of scarcity and stress like the first months of the pandemic.
Support low income refinancers
To help balance this refinancing inequality, the FDIC and CFR study authors suggest that lawmakers can create policies that encourage the refinancing activity of low-income refinancers in the early stages of the funding application process. To start creating these policies, lawmakers can focus on:
- create incentives for lenders to provide loans to borrowers who meet a target profile;
- encouraging financial education for low income borrowers; and
- improve refinancing processes to circumvent the effects of behavioral bias, according to the FDIC and CFR.
When developing these new policies, legislators need to be careful as they will target low-income groups who are most vulnerable. Thus, any legislation created to increase refinancing of low-income groups must be micro-managed in a “T” to ensure that low-income borrowers will not be negatively affected, but receive the full benefits of refinancing.
Real estate professionals may also help promote financial literacy by referring clients to the Consumer Financial Protection Bureau (CFPB) for a variety of educational resources and publications related to reverse mortgage coverage, refinancing procedures and the buying process of a house.
first tuesday offers a number of free forms that agents can download and complete with clients, including a Mortgage Purchasing Worksheet that helps homebuyers compare mortgage terms. [See RPI Form 312]
With mortgage interest rates on the rise, this refinancing trend is unlikely to continue. In fact, the refinancing window closes quickly, so first tuesday Readers, stay tuned for the future development of this trend.
Refinancing and running: why the divide and how to close the gap