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Original title:
Financial skills and search in the mortgage market
Authors: Cota, Marta ; Šterc, Ante
Document type: Research reports
Year: 2024
Language: eng
Series: CERGE-EI Working Paper Series, volume: 780
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: financial skills; mortgage refinancing; mortgage search
Institution: Economics Institute AS ČR (web)
Document availability information: Fulltext is available at external website.
External URL: https://www.cerge-ei.cz/pdf/wp/Wp780.pdf
Original record: https://hdl.handle.net/11104/0353380
Permalink: http://www.nusl.cz/ntk/nusl-614323
The record appears in these collections:
Research > Institutes ASCR > Economics Institute
Reports > Research reports
Authors: Cota, Marta ; Šterc, Ante
Document type: Research reports
Year: 2024
Language: eng
Series: CERGE-EI Working Paper Series, volume: 780
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: financial skills; mortgage refinancing; mortgage search
Institution: Economics Institute AS ČR (web)
Document availability information: Fulltext is available at external website.
External URL: https://www.cerge-ei.cz/pdf/wp/Wp780.pdf
Original record: https://hdl.handle.net/11104/0353380
Permalink: http://www.nusl.cz/ntk/nusl-614323
The record appears in these collections:
Research > Institutes ASCR > Economics Institute
Reports > Research reports
Record created 2024-05-12, last modified 2024-05-12