Paying Too Much? Borrower Sophistication and Overpayment in the US Mortgage Market

Neil Bhutta and Aurel Hizmo
Authors registered in the RePEc Author Service: Andreas Fuster

No 14924, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 (search for similar items in EconPapers)
JEL-codes: E43 G21 G51 G53 (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-ban, nep-fle, nep-mac and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Working Paper: Paying Too Much? Borrower Sophistication and Overpayment in the US Mortgage Market (2024)
Working Paper: Paying Too Much? Borrower Sophistication and Overpayment in the US Mortgage Market (2024)
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