With mortgage interest rates at record lows, it’s 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 are taking advantage of the savings.
From January 2020 to October 2020, only 6% of Black homeowners refinanced, compared with nearly 12% of white homeowners, according to the report, which also revealed a significant racial gap in past-due mortgage payments during the pandemic.
Wharton real estate professor Benjamin Keys wants to see that gap closed.
“I always think of mortgage refinancing as the one financial decision that households leave a lot of money on the table by failing to take advantage of,” he said. “With all the personal financial advice you can get out there—cut back on your Starbucks purchases or whatever—those are just a drop in the bucket compared to locking in a long-term low mortgage rate for your home.”
The reasons behind the racial disparity in refinancing align with documented evidence about other inequities in housing, Keys explains. Structural racism built into both public policy and the private sector has led to longstanding asymmetry in income, credit scores, loan-to-value ratios and other risk factors that inhibit refinancing for minorities.
The coronavirus pandemic is exacerbating the problem, Keys says, because Black and Hispanic households are more likely to experience job loss than white households. The U.S. unemployment rate in May dropped to 5.8%, yet it was 7.3% for Hispanics and 9.1% for Blacks.
“Some of this may be a function of just measuring incomes and employment disruptions, but I think there is another factor, which is related to just how tight mortgage credit is right now,” says Keys. “Mortgage credit is perceived as being very tight. It can be a hard time to get a loan, and there are a lot of hoops to jump through when you’re refinancing.”
Read more at Knowledge@Wharton.