Black and lower-income homeowners missed out on the refinancing boom spurred by low interest rates

Mortgage interest rates have dropped to historic lows in the last couple of years, presenting many homeowners the chance to save money by refinancing their loans — an opportunity that Black and low-income homeowners haven’t been able to enjoy because of various barriers.

According to a report released this month by the Federal Reserve Bank of Philadelphia, Black and lower-income homeowners have not lowered their monthly mortgage payments because disparities in financial education and knowledge of refinancing opportunities, in financial stability, and in who financial institutions target with opportunities mean fewer of these homeowners complete applications.

» READ MORE: Millions of homeowners can still cut their mortgage payments with refinancing

The number of refinanced home loans in New Jersey, Pennsylvania, and Delaware in 2020 was more than 200% higher than the average over the previous two years, according to the report, “but that growth was not equally shared across groups,” said Kyle DeMaria, the report’s author and a community development research associate at the Philadelphia Fed.

The growth rate for refinances for Black and low- and moderate-income homeowners was half to three-quarters the growth rate of borrowers overall. Low- and moderate-income households are those making below 50% and below 80% of area median income, respectively. That’s $47,250 or $75,600 for a family of four in the Philadelphia metropolitan area.

Fewer Black and low- and moderate-income homeowners applied to refinance their mortgages, which drove the disparity, according to the Philadelphia Fed report.

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Homeowners in these groups who did apply for refinancing also were denied at higher rates than applicants overall, even though their denial rates declined in 2020. Financial institutions were most likely to deny Black applicants because of inadequate or poor credit history. They were most likely to deny low- and moderate-income applicants because they had too much debt compared with their income.

During refinancing 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 the Philadelphia Fed’s Consumer Finance Institute.

Financial institutions and organizations that support homeowners could help them improve their credit, tackle debt, and put them on the right path to access opportunities, DeMaria said.

Nationally, homeowners with federally backed mortgages who refinanced to a new 30-year mortgage in 2020 saved an average of $280 per month, according to a 2021 report by the Federal Reserve Banks of Atlanta, Boston, and Philadelphia.

» READ MORE: Long-term US mortgage rates fall this week to 3.76%

Homeownership is relatively more expensive for Black households compared with white households because of inequities in employment and income. The median household income of Black Philadelphia homeowners is about $47,000, while the median household income of white Philadelphia homeowners 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 dropping rates to refinance their mortgages.

Black and Hispanic borrowers across the country were both significantly more likely than white borrowers to miss payments because of financial trouble and significantly less likely to refinance their loans to lower their payments in 2020, according to the 2021 report. Between January and October 2020, among homeowners with federally backed mortgages, about 6% of Black borrowers and 9% of Hispanic borrowers refinanced compared with 12% of white borrowers.

» READ MORE: It’s no easier for Black Philadelphians to become homeowners now than it was 30 years ago

Black and Hispanic workers also lost their jobs at higher rates than white workers during the pandemic.

“These groups being particularly hard hit in the pandemic made these gaps [in refinancing] even larger than we would have normally expected,” said Lambie-Hanson, a coauthor of the 2021 report.

To refinance, applicants have to be current on their mortgage payments and be able to afford closing costs, which are typically 1% of the mortgage balance plus $2,000. Borrowers usually have the option of rolling those costs into their new mortgage, but they must pay interest on the amount over the life of the loan. Thanks to rapidly rising home values, most homeowners have the equity to refinance. But doing so has to make sense in terms of how long homeowners plan to stay in their home and potential savings.

» READ MORE: Interest rates will rise in 2022 and other predictions for the housing market

The average 30-year fixed mortgage rate dropped 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 refinanced home loans nationwide continued to drop at the end of 2021 as rates have risen, and many qualifying homeowners have already applied. Refinances were down 11% from the third quarter and down 23% from a year earlier, according to the real estate data provider Attom. The annual decrease was the largest drop in three years, Attom said.

Refinanced loans still make up the majority of residential lending — 55% of mortgages in the last quarter of 2021. But that share is down from 62% in the fourth quarter of 2020.

This story has been updated to clarify homeowners’ options on how to pay closing costs.

The Philadelphia Inquirer is one of more than 20 news organizations producing Broke in Philly, a collaborative reporting project on solutions to poverty and the city’s push toward economic justice. See all of our reporting at brokeinphilly.org.