With mortgage interest rates at an all-time low, it comes as no surprise that millions of homeowners are rushing to refinance their loans. But a new report from Federal Reserve economists shows a surprising gap between white and minority borrowers who use savings.
From January 2020 to October 2020, only 6% of black homeowners refinanced, compared with nearly 12% of white homeowners, according to the data. reportwhich also revealed a significant racial gap in mortgage arrears during the pandemic.
Another recent poll from Freddie Mac found that nearly half of black and Hispanic borrowers can save $ 1,200 a year through refinancing, but they do so at significantly lower levels than white borrowers.
Wharton Professor of Real Estate Benjamin Keys wants this gap closed.
“I always think of mortgage refinancing as the only financial solution that households leave a lot of money on the table, failing to take advantage of,” he said. “With all the personal financial advice you can get – cut back on your Starbucks purchases or whatever – it’s just a drop in the ocean compared to fixing a long-term low mortgage rate for your home.”
“I encourage people to shop from trusted sources and also go back to their bank and talk to them.” –Benjamin Keys
Causes of racial inequality in refinancing are consistent with documented evidence from others housing injusticeKeyes said in an interview. Wharton Business Daily on SiriusXM… (Listen to the podcast above.) Structural racism inherent in both public policy and the private sector has led to long-standing asymmetries in income, credit ratings, loan-to-value ratios, and other risk factors that prevent minorities from refinancing.
The coronavirus pandemic is exacerbating the problem, Keyes said, because black and Hispanic families are more likely to face the problem. job loss than white households. IN US unemployment rate in May it fell to 5.8%, while for Hispanics it was 7.3%, and for blacks – 9.1%.
“In part, this may just be a function of measuring income and disruptions in employment, but I think there is another factor that has to do with how tough mortgages are now,” added Keyes. “Mortgage loans are perceived as very limited. Getting a loan can be difficult and there are many hurdles to overcome when refinancing. ”
Refinancing can lead to thousands of upfront costs for property revaluation, title searches, application fees, and other fees. These costs can be a disincentive for some minority homeowners who are cash-strapped or may be suspicious of the process.
“They might feel like jumping over these hoops once was a big burden, so they might not feel like it’s worth it,” Keyes said. “Or they may be worried about being rejected if they apply again.”
Trust is another problem, he said. Past abuse and fears of being scammed may prevent some minority homeowners from researching their refi options. But Keyes advised them not to miss out on potential savings.
“I encourage people to shop from trusted sources and also go back to their bank and talk to them,” he said. “The biggest refinancing boom has subsided a little, so I think that mortgage brokers and lenders are now slightly better able to answer phone calls and answer questions.”
Why can’t refinancing be automatic?
The most popular mortgage in America is the 30 year fixed rate loan. It’s sustainable and safe, according to Keyes, even if it’s not always the best choice for consumers. For example, young borrowers are unlikely to stay in the same home long enough to reap the benefits. However, there is not much innovation when it comes to lending instruments.
“It can be a challenging time to get a loan and there are many obstacles to overcome when you refinance.” –Benjamin Keys
The idea of automatic refinancing, which triggers when rates fall by a certain number of basis points, will benefit all households and help balance out some racial differences, he said. Automatic refinancing is certainly possible from a technical and service point of view; adjustable rate mortgages are already doing this. But convincing mortgage-backed securities investors to accept this will not be easy.
“Are investors ready to assess and understand the risks they will face if they buy a pool of these mortgages? I think this is something really worth experimenting with, ”Keyes said. “There is just a real lack of innovation, and as we can see, head of the Federal Housing Administration“I think someone has the potential to step into this area and really revitalize Fannie Mae and Freddie Mac as engines of innovation and mortgage finance.”
Mortgage interest rates hover just above 3% for a 30-year loan and lower than for a 15-year loan and ARM. The record low rates, which are the result of the Fed’s monetary policy and other market factors, are expected to rise very gradually over the next year or two. That means now is a great time to refinance or buy a home, Keyes said.
“I don’t have a crystal ball, but it looks like mortgage interest rates will remain quite low,” he said. “I doubt they will fall back to 2.75% or even slightly lower, so a fix at around 3% seems like a fantastic option.”