Working Paper: CEPR ID: DP14924
Authors: Neil Bhutta; Andreas Fuster; Aurel Hizmo
Abstract: Using administrative data on mortgage rates that borrowers obtain and on rates that lenders could provide for the same loan, we find that many homebuyers significantly overpay for their mortgage, particularly those least likely to be financially savvy. For example, one quarter of government-insured borrowers, who tend to be lower-income first-time homebuyers, pay at least 45 basis points more than their median available rate—equivalent to an upfront payment (in points) of $5,400 for a typical loan. We further document considerable dispersion in the interest rates that identical borrowers get, even from the same lender and loan officer, suggesting important roles for shopping and negotiation. Across time, we find that overpayment tends to decrease as market rates rise and, using new survey data, provide direct evidence that borrowers shop more when market rates are higher, suggesting that behavioral forces affect search effort. More generally, we use the survey data to demonstrate that a significant amount of the mortgage rate variation across consumers can indeed be traced to heterogeneity in financial knowledge and shopping behavior.
Keywords: mortgage market; household finance; price dispersion; financial literacy
JEL Codes: G21; G51; G53; E43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lower financial literacy (G53) | overpayment for mortgages (G21) |
| borrower sophistication and search behavior (G51) | overpayment for mortgages (G21) |
| perceived urgency to shop when market rates are low (E43) | effectiveness of borrower negotiation efforts (F34) |
| market interest rates rise (E43) | overpayment decreases (G32) |
| financial knowledge and shopping behavior (G53) | mortgage rate variation (G21) |
| low-FICO and high-LTV borrowers (G51) | pay more than median available rate (E49) |