Financial Skills and Search in the Mortgage Market

Marta Cota and Ante Sterc

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: Are households with low financial skills disadvantaged in the mortgage market? Using stochastic record linking, we construct a unique U.S. dataset encompassing a rich set of mortgage details and borrowers’ characteristics, including their objective financial literacy measure. We find that households with low financial literacy are up to 4% more likely to search less and lock in at 15-20 b.p. higher rates. Upon origination, unskilled borrowers face a 35-45% higher mortgage delinquency and end up with a 30% lower likelihood of refinancing. Overall, for a $100,000 loan, the potential losses from low financial literacy are more than $9,329 over the mortgage duration. To understand how financial education, more accessible mortgages, or mortgage rate changes affect households with low financial literacy, we formulate and calibrate a mortgage search model with heterogeneous search frictions and endogenous financial skills. Our model estimates show that search intensity and financial skill variations contribute to 55% and 10% of mortgage rate variations, respectively. We find that i) more accessible mortgages lead to a higher delinquency risk among low-skilled households, ii) financial education mitigates the adverse effects of increased accessibility, and iii) low mortgage rates favor high-skilled homeowners and, by reinforcing refinancing activity, deepen consumption differences across different financial skill levels.

Keywords: mortgage refinancing; mortgage search; financial skills; financial education; consumption inequality (search for similar items in EconPapers)
JEL-codes: E21 G51 G53 (search for similar items in EconPapers)
Date: 2024-05
New Economics Papers: this item is included in nep-ban, nep-fle, nep-mac and nep-ure
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