Fewer black and low-income homeowners refinanced to get record interest rate
Mortgage interest rates have fallen to historic lows over the past two years, giving many homeowners the chance to save money by refinancing their loans — an opportunity black and low-income homeowners don’t. were unable to enjoy due to various obstacles.
According to a report released this month by the Federal Reserve Bank of Philadelphia, black and low-income homeowners have not lowered their monthly mortgage payments due to disparities in financial literacy and awareness of refinancing opportunities, financial stability and targeting financial institutions with opportunities means fewer of these owners are filling out applications.
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The number of home loans refinanced in New Jersey, Pennsylvania and Delaware in 2020 was more than 200% higher than the average of the previous two years, the report said, “but this growth was not evenly distributed across groups,” Kyle said. DeMaria, report author and community development research associate at the Philadelphia Fed.
The growth rate of refinances for black and low-to-moderate income homeowners was half to three-quarters the growth rate for all borrowers. Low- and middle-income households are those earning respectively less than 50% and less than 80% of the region’s median income. That’s $47,250 or $75,600 for a family of four in the Philadelphia metro area.
According to the Philadelphia Fed report, fewer black and low-to-moderate income homeowners asked to refinance their mortgages, leading to the disparity.
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Owners of these groups who applied for refinance were also turned down at higher rates than applicants overall, although their rejection rates declined in 2020. Financial institutions were most likely to turn down black applicants due to inadequate or poor credit history. They were more likely to turn down low- or middle-income applicants because they had too much debt relative to their income.
During refinance booms, lenders with limited staff may be more likely to prioritize higher credit quality borrowers whose loans are easier to process, said Lauren Lambie-Hanson, senior adviser and research fellow at Philadelphia Fed Consumer Finance Institute.
Financial institutions and organizations that support homeowners could help them improve their credit, reduce debt and put them on the right track to access opportunities, DeMaria said.
Nationally, homeowners with federally backed mortgages who refinanced a new 30-year mortgage in 2020 saved an average of $280 per month, according to a 2021 report from Federal Reserve Banks of Atlanta, from Boston and Philadelphia.
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Home ownership is relatively more expensive for black households than for white households due to employment and income inequalities. The median household income of black homeowners in Philadelphia is about $47,000, while the median household income of white homeowners in Philadelphia is close to $78,000, according to Philadelphia Fed researchers.
Historically, homeowners with higher incomes and credit scores — who are more likely to be white — are much more likely to take advantage of lower rates to refinance their mortgages.
According to the 2021 report, black and Hispanic borrowers across the country were both significantly more likely than white borrowers to miss payments due to financial hardship and significantly less likely to refinance their loans to lower their payments in 2020. Between January and October 2020, among homeowners with federally backed mortgages, about 6% of black borrowers and 9% of Hispanic borrowers refinanced compared to 12% of white borrowers.
READ MORE: Homeownership isn’t easier for black people in Philadelphia than it was 30 years ago
Black and Hispanic workers have also lost their jobs at higher rates than white workers during the pandemic.
“These groups being particularly hard hit by the pandemic created these gaps [in refinancing] even bigger than we would have normally expected,” said Lambie-Hanson, co-author of the 2021 report.
To refinance, applicants must be current on their mortgage payments and be able to afford closing costs, which are typically 1% of the mortgage balance plus $2,000. Thanks to rapidly rising home values, most homeowners have the equity to refinance. But it has to make sense in terms of how long homeowners plan to stay in their home and potential savings.
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The average 30-year fixed mortgage rate fell to a record low of 2.65% in January 2021, down from the pre-pandemic rate of 4%. The average rate on a 30-year home loan was 3.76% last week.
The number of home loans refinanced nationwide continued to decline at the end of 2021 as rates increased and many eligible homeowners have already applied. Refinances were down 11% from the third quarter and 23% from a year earlier, according to real estate data provider Attom. The annual drop was the biggest drop in three years, Attom said.
Refinanced loans still make up the majority of residential loans – 55% of mortgages in the last quarter of 2021. But that share is down from 62% in the fourth quarter of 2020.