Philadelphia Fed, Report: Not Cashing In on Cashing Out

“We find that many borrowers fail to convert high-interest debt into low-interest debt even when inertia, most information frictions, and fixed costs are eliminated. We focus on borrowers that have already overcome the inertia and information frictions by considering mortgage borrowers that have already chosen to refinance. Furthermore, we show that lowering (or eliminating) the cost of cashing out does not significantly increase the cash-out propensity of borrowers who would benefit from converting high-interest debts into lower interest mortgages. On the other hand, our findings suggest that a “nudge” encouraging borrowers to take advantage of a cash-out opportunity may be quite effective.”