Out of Sight, Out of Mind: Financial Illiteracy, Inattention, and Sluggish Mortgage Refinancing

56 Pages Posted: 29 Nov 2014 Last revised: 3 Mar 2015

See all articles by Emanuele Bajo

Emanuele Bajo

University of Bologna - Department of Economics

Massimiliano Barbi

University of Bologna - Department of Management

Date Written: February 2015

Abstract

We analyze the effect of an exogenous shock to the Italian mortgage market. A new reform passed in 2007 has abolished prepayment fees and simplified mortgage refinancing, making it akin to a cost-free decision to households. This law — along with the almost simultaneous drop in market interest rates — has generated important gains for fixed rate borrowers, which we quantify at up to 8 percent of the principal balance. Nevertheless, only 4.2 percent of borrowers have locked in this opportunity. We establish a causal relationship between this sluggish behavior, investors’ inattention, and their level of financial illiteracy.

Keywords: Mortgage Refinancing, Financial Literacy, Household Finance

JEL Classification: G14, G32

Suggested Citation

Bajo, Emanuele and Barbi, Massimiliano, Out of Sight, Out of Mind: Financial Illiteracy, Inattention, and Sluggish Mortgage Refinancing (February 2015). Available at SSRN: https://ssrn.com/abstract=2531366 or http://dx.doi.org/10.2139/ssrn.2531366

Emanuele Bajo (Contact Author)

University of Bologna - Department of Economics ( email )

Bologna
Italy

Massimiliano Barbi

University of Bologna - Department of Management ( email )

via Capo di Lucca 34
Bologna, 40126
Italy
+39 051 2098404 (Phone)
+39 051 246411 (Fax)

HOME PAGE: http://www.sites.google.com/site/massimilianobarbifinance/

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