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Paying Too Much? Price Dispersion in the U.S. Mortgage Market

Neil Bhutta, Andreas Fuster () and Aurel Hizmo

No 2020-062, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We document wide dispersion in the mortgage rates that households pay on identical loans, and show that borrowers' financial sophistication is an important determinant of the rates obtained. We estimate a gap between the 10th and 90th percentile mortgage rate that borrowers with the same characteristics obtain for identical loans, in the same market, on the same day, of 54 basis points|equivalent to about $6,500 in upfront costs (points) for the average loan. Time-invariant lender attributes explain little of this rate dispersion, and considerable dispersion remains even within loan officer. Comparing the rates borrowers obtain to the real-time distribution of rates that lenders could offer for the same loan and borrower type, we find that borrowers who are likely to be the least financially savvy tend to substantially overpay relative to the rates available in the market. In the time series, the average overpayment decreases when overall market interest rates rise, suggesting that a rising level of borrowing costs encourages more search and negotiation. Furthermore, new survey data provide direct evidence that financial knowledge and shopping both affect the mortgage rates borrowers get, and that shopping activity increases with the level of market rates.

Keywords: Financial literacy; Household finance; Interest rates; Mortgages; Price dispersion; Search; Shopping (search for similar items in EconPapers)
JEL-codes: E43 G21 G53 G51 (search for similar items in EconPapers)
Pages: 69 p.
Date: 2020-08-21
New Economics Papers: this item is included in nep-ban, nep-fle, nep-mac and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2020-62

DOI: 10.17016/FEDS.2020.062

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