When Kara Hartz, a 31-year-old schoolteacher, moved to Evansville, Ind., with her husband in 2008, she was intimidated by the high 5.8% interest rate on their 30-year fixed-rate mortgage. But it was better than staying in her quickly depreciating home in Tampa as she and husband started a family.
Hartz also has hefty student loans that she hopes to pay off before their kids -- they now have three, ages 5, 3 and 1 -- are out of the house. Things were tight.
But now that mortgage rates have dropped to all-time lows, Hartz and millions like her are taking advantage of the chance to get some more financial breathing room.
Although the common wisdom holds that there are more hoops to jump through now in the refi process, and that the underwriting standards are more stringent, applications for refinancing are way up: Total mortgage applications soared 17% last week and the refinance index jumped 22%, according to the Mortgage Bankers Association. But still a lot more people could be refinancing than there are currently.
Last year, 35% of the 50 million U.S. mortgages out there qualified for refinancing, according to Credit Sesame, an online saving platform. That's 17.5 million households that could apply to refinance. But only 4.5 million did so -- meaning almost three-quarters of those who could hadn't tried. Further, Credit Sesame found that people are overspending by an average of $5,748 a year on their mortgages, because they're not carrying the best one for which they'd qualify. The average Joe could have fully funded his IRA with the money he'd save by refinancing.
So why aren't more people following the Hartzes back to the bank?
It comes down to psychology and behavioral economics: People are unmotivated, scared or uninterested. But these sentiments are often rooted in misconceptions about the difficulty and value of refinancing.
Myth 1: Times Are Too Hard to Refinance
The economic environment and the real estate market's troubles have cut into Americans' finances on the income side, but they're also sapping our motivation to search for savings on the debt side, according to Kelli Dudley, an attorney who teaches real estate and civil litigation at Chicago's DePaul University School of Law.
"The mortgage foreclosure fiasco has had a major mental health cost for consumers," Dudley said. "It is difficult to make economically rational decisions when the underpinnings of home ownership have been shaken. In short, consumers no longer trust lenders and see them as the enemy."
The ongoing gloomy reports of underwater homeowners, foreclosures and robo-signing scandals have undermined trust in banks.
That, in turn, can lead people to give up hope of financial relief, and make them think a refi effort would be futile or even detrimental, said Dan Ariely, a professor of psychology and behavioral economics at Duke.
"One of the things about trust that has been largely lost in the last few years is that people might worry more about the small details," Ariely said. "People are looking at this small print in different ways, and are very cautious that this is ... not going to be good for them. Mortgages have been tainted."
The Hartzes were in precisely that postion as they hemmed and hawed at the prospect of refinancing.
But if homeowners haven't refinanced even in the last six months, said Credit Sesame's marketing VP Irene Shubladze, they are foregoing a lot of savings.
Myth 2: The Process Is Too Painful
"Refinancing mortgages can be daunting, and it's difficult to get to simple answers," Shubladze said. "You're looking at APRs, and interest rates, and then you need to figure out how many years you're going to stay in the house."
Plus, there's the time investment of shopping for deals, reading the fine print, gathering the required paperwork and sending in documentation, and paying lender and attorney fees. Lenders have also tightened up underwriting in response to criticism about "low-doc" and "no-doc" loans, Dudley said.
Hartz dreaded that fiscal and existential probing. Beyond that, she was directing a musical at her middle school and putting in 12-hour days, and initially thought the process would be too burdensome for her to see it through. Nonetheless, with help from Credit Sesame, this March, she traded in the 5.8%, 30-year fixed-rate mortgage for a 3%, 15-year loan.
The Hartzes' payments are $100 more a month than they were previously, but by shaving some 11 years off their payoff timeline, they'll save around $50,000 in interest over the life of the loan.
"It gives us peace of mind," Hartz said. "Before our kids go to college, this house could be paid for."
"The market is tight, and [refinancing a mortgage] is not an easy process," Shubladze said. "But if you look at how much money you can get back, then the effort will be worth it."
Also, because there are mortgage refi loans available with no closing costs, there's no disincentive to refinance to save even 1% or less, according to Pete D'Arruda, president of Capital Financial Advisory Group in Cary, N.C.
"The busiest person in the world should be the mortgage person," D'Arruda said.
Myth 3: Investing Is the Better Way to Make Money
Like the gym rat who constantly works his biceps but neglects his core, many people focus too much on trying to increase their wealth by managing their assets, but neglect to address their liabilities. Saving money via methods such as improving your credit score or refinancing your mortgage just aren't the instinctive go-to strategies for boosting our financial strength.
They should be.
"There's a lot of overlooked savings, because people are looking at assets and diversifying their assets, and not taking advantage of savings on the liability side," Shubladze said. "Investing is something that's been drilled into our head. The news doesn't address the other side of the balance sheet."
When you're investing, the most you can typically hope for is to win against the market by 10%. But that's a lot more work than saving $5,000 on your mortgage, which (once you already own the home) comes with little added investment risk.
"Everyone wants to brag and find that next Apple," D'Arruda said. "I'm amazed at how much risk people are taking. They're climbing the equivalent of a 30-foot ladder with no one holding it."
People want to keep up with the Joneses by growing their assets, D'Arruda said. And it's true that even young professionals from Gen X and Gen Y are fearlessly wading into treacherous investment waters.
"We're chasers by nature," D'Arruda said. "Back from the cave man days, it's in our genes to hunt and gather when we should be inside conserving what we've gathered."
But What If I Don't Qualify?
Though more people should be filing applications to get better rates, there are many who aren't good candidates to secure a refinance right now. Those who can't get one yet would do well to improve their credit scores by following this advice and avoiding these pitfalls. If rates stay low, taking a long view on the problem of mortgage debt -- rather than letting intimidation and gloom keep you from trying -- could lead to serious savings later.