Avoiding costly refinancing mistakes: Knowing when to wait

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Avoiding costly refinancing mistakes: Knowing when to wait

Serafin Grundl and You Kim recently published a research article in Federal Reserve System’s Finance and Economics Discussion Series on “Consumer Mistakes and Advertising: The Case of Mortgage Refinancing”. The authors estimate the effect of advertising on consumer mistakes and quantify the resulting net effect on consumers in the market for mortgage refinancing. They demonstrated that a policy that redirects all advertising to borrowers who should refinance would appreciably increase the gain in borrower welfare.

Specifically, authors note that mortgage refinance (refi) advertising can help inattentive borrowers who should refinance but fail to take advantage of lower interest rates by informing them. However, refi ads can also be deceptive. Lenders commonly advertise the projected reduction in monthly mortgage payments without pointing out that this reduction is partly achieved through an extension of the loan term, rather than through a reduction of the interest rate. Such ads have the potential to convince borrowers who should wait to refinance prematurely.

The article truly reverberated with the STEM Lending team: we at STEM Lending are committed to helping our clients make rational financial decisions and be a trusted advisor to them, striving to help them make the right decisions concerning their mortgage at the right time.

In coming months, we will continue to publish a series of STEM Perspectives, helping demystify the mortgage landscape. Stay tuned and feel free to reach us on Facebook (https://www.facebook.com/STEMLending), Twitter (https://twitter.com/STEMLending) or via email at hi@stemlending.com if you have anything to share!

Reference: Consumer Mistakes and Advertising – The Case of Mortgage Refinancing

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