Out of Sight, Out of Mind: Financial Illiteracy, Inattention, and Sluggish Mortgage Refinancing
56 Pages Posted: 29 Nov 2014 Last revised: 3 Mar 2015
Date Written: February 2015
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: Suggested Citation