Abstract

https://ssrn.com/abstract=2548316
 


 



Systematic Mistakes in the Mortgage Market and Lack of Financial Sophistication


Sumit Agarwal


Georgetown University - Department of Finance

Itzhak Ben-David


Ohio State University - Fisher College of Business, Finance Department; National Bureau of Economic Research (NBER)

Vincent W. Yao


Georgia State University - J. Mack Robinson College of Business

March 1, 2016

Journal of Financial Economics (JFE), Forthcoming
Charles A. Dice Working Paper No. 2016-09
Fisher College of Business Working Paper No. 2016-03-9

Abstract:     
Institutions often offer a menu of contracts to consumers in an attempt to create a separating equilibrium that reveals borrower types and provides better pricing. We test the effectiveness of a specific set of contracts in the mortgage market: mortgage points. Points allow borrowers to exchange an upfront amount for a decrease in the mortgage rate. We document that, on average, points takers lose about $700. Also, points takers are less financially savvy (less educated, older), and they make mistakes on other dimensions (e.g., inefficiently refinancing their mortgages). Overall, our results show that borrowers overestimate how long they will stay with the mortgage.

Number of Pages in PDF File: 45

Keywords: Discount points, mortgage decision making, refinancing, leverage, financial literacy, household finance, inattentiveness

JEL Classification: D03, D12, D14, D18, G01, G21


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Date posted: January 12, 2015 ; Last revised: June 23, 2016

Suggested Citation

Agarwal, Sumit and Ben-David, Itzhak and Yao, Vincent W., Systematic Mistakes in the Mortgage Market and Lack of Financial Sophistication (March 1, 2016). Journal of Financial Economics (JFE), Forthcoming; Charles A. Dice Working Paper No. 2016-09; Fisher College of Business Working Paper No. 2016-03-9. Available at SSRN: https://ssrn.com/abstract=2548316 or http://dx.doi.org/10.2139/ssrn.2548316

Contact Information

Sumit Agarwal
Georgetown University - Department of Finance ( email )
3700 O Street, NW
Washington, DC 20057
United States
202-687-8207 (Phone)
HOME PAGE: http://www.ushakrisna.com

Itzhak Ben-David
Ohio State University - Fisher College of Business, Finance Department ( email )
2100 Neil Avenue
Fisher 700D
Columbus, OH 43210-1144
United States
773 988 1353 (Phone)
HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/index.htm

National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
HOME PAGE: http://fisher.osu.edu/fin/faculty/Ben-David/
Vincent W. Yao (Contact Author)
Georgia State University - J. Mack Robinson College of Business ( email )
35 Broad Street
Atlanta, GA 30303-3083
United States
Feedback to SSRN


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