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

70 Pages Posted: 22 Jul 2019 Last revised: 29 Jan 2021

See all articles by Neil Bhutta

Neil Bhutta

Board of Governors of the Federal Reserve System

Andreas Fuster

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Aurel Hizmo

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: July 19, 2019

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: mortgages, household finance, interest rates, financial literacy, price dispersion

JEL Classification: G21, D14, D18, D83, E43

Suggested Citation

Bhutta, Neil and Fuster, Andreas and Hizmo, Aurel, Paying Too Much? Borrower Sophistication and Overpayment in the US Mortgage Market (July 19, 2019). Available at SSRN: https://ssrn.com/abstract=3422904 or http://dx.doi.org/10.2139/ssrn.3422904

Neil Bhutta

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Andreas Fuster (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Chamberonne
Bâtiment Extranef
CH-1015 Lausanne
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Aurel Hizmo

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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