Many Black and Hispanic Homeowners Don’t Refinance. Here’s Why.

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$1,200. That’s the yearly amount Black and Hispanic homeowners could save if they took advantage of refinance opportunities, according to a recent Freddie Mac study.

Although refinancing can help reduce mortgage costs, increase housing stability and build generational wealth, a disproportionate number of Black and Hispanic homeowners don’t pursue this important financial tool. While interest rates remain at record lows, a better understanding among housing industry stakeholders on refinancing aversions can help broaden the funnel of homeowners looking to refinance and increase homeowner equity for Black and Hispanic Americans.

Some Benefit More Than Others

We recently examined active 30-year fixed-rate loans funded by Freddie Mac as of January 2021 to determine whether borrowers with older loans would benefit from refinancing. Of those who refinanced between April 2020 and January 2021, we looked at how many were held by Black and Hispanic borrowers. We found that:

• 38% of white borrowers could save at least $100 per month from refinancing at today’s rates; the percentage increases to nearly 50% for Black and Hispanic borrowers.
• 13% of white borrowers could save at least $200 per month and nearly 20% of Black and Hispanic borrowers could save that same amount.
• For those who could save at least $100 per month, 19.6% of Black borrowers, 23.4% of Hispanic borrowers, and 32.1% of white borrowers actually refinanced during the study period.

These findings underscore that although a higher proportion of Black and Hispanic borrowers have a stronger financial incentive to refinance, they do so at substantially lower levels than white borrowers.
Why?

Barriers to Refinancing

The reasons behind the racial and ethnic disparity in refinancing may not stray far from issues Black and Hispanic borrowers experienced during their initial home purchase. The scenario of mortgage refinancing hesitancy plays out for Black and Hispanic homeowners in cities and towns across America. Often the first generation of their families to venture into homeownership, they navigated the homebuying process largely on their own without the advice or financial help of a family member. Refinancing may surface a lingering sense of mistrust, fear of potential rejection or discrimination, and closing cost concerns, due to a number of barriers around understanding the mortgage process. Even when some homeowners suspect they’d save money by refinancing, the thought of going through these fraught steps again may hold them back.

In terms of closing costs, the average cost to complete a refinance averages around $5,000, which can pose a challenge for some borrowers. According to the Federal Reserve’s 2019 Survey of Consumer Finances, about 59% of Hispanic borrowers, 53% of Black borrowers, and 32% of white borrowers had less than $5,000 in liquid assets—a figure that could be lower now as a result of the pandemic.

Leveraging Tools to Remove Obstacles

Lenders and other housing professionals can use refinance solutions to build trust, community stability and support generational wealth for Black and Hispanic Americans. To help promote and inspire Black and Hispanic homeowners to take advantage of refinance opportunities:

• Use mortgage documents and educational tools available in Spanish to clearly show the benefits of a new loan with a lower rate or better terms.
• Leverage relationships with community leaders and housing counselors in minority areas to increase awareness about the value of refinancing and options available to help with closing costs.
• Expand your trusted advisor network in minority communities through housing agencies, churches, employers, labor unions and other groups to help underserved communities strengthen relationships with financial services providers.
• Share educational tools, which can help borrowers become aware of the options available to them in the form of no-cost refinancing, where they a pay a higher interest rate in exchange for no closing costs. They might also be eligible for grants to cover closing costs.
• Explore a wide array of available refinancing mortgage offerings that can help eligible lower-income borrowers with Freddie Mac-owned mortgages take advantage of lower interest rates and eligibility flexibilities.
• Understand how low down payment mortgages offer affordable flexibilities and solutions for people looking to refinance their home. These can offer caps or exemptions on fees and assessments and lower mortgage insurance requirements.
• Find other solutions (if refinance is not an option) such as energy efficiency and renovation mortgages that can provide alternative ways to help homeowners lower monthly costs and increase long-term savings.

In a nation that’s fast-diversifying, strengthening ties in minority communities, promoting financial education and leveraging innovative mortgage offerings can pay off for everyone. Freddie Mac and the housing industry is prioritizing education, outreach and new solutions for lower-income borrowers to make refinance more accessible. This could make the difference for people struggling to hold onto their homes and the wealth homeownership generates and, one by one, help close the racial homeownership gap.