Financial skills and search in the mortgage market

0585688 - NHÚ 2025 RIV CZ eng V - Research Report
Cota, Marta - Šterc, Ante
Financial skills and search in the mortgage market.
Prague: CERGE-EI, 2024. 104 s. CERGE-EI Working Paper Series, 780. ISSN 2788-0443
Institutional support: RVO:67985998
Keywords : mortgage refinancing * mortgage search * financial skills
OECD category: Applied Economics, Econometrics
https://www.cerge-ei.cz/pdf/wp/Wp780.pdf

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.
Permanent Link: https://hdl.handle.net/11104/0353380