Financial Illiteracy and Mortgage Refinancing Decisions
Posted: 15 Aug 2018 Last revised: 30 Aug 2018
Date Written: August 1, 2018
We analyze the effect of an exogenous shock to the Italian mortgage market, where a reform has abolished prepayment fees and simplified mortgage refinancing, making it a virtually cost-free decision for households. This law, along with the considerable drop in market interest rates, has generated important gains for fixed-rate borrowers, which we quantify at up to 15 percent of the principal balance. Nevertheless, only about 13 percent of borrowers have locked in this opportunity. We study the relationship between this sluggish behavior and their level of financial literacy.
Keywords: Mortgage refinancing, Financial literacy, Household finance
JEL Classification: G14, G32
Suggested Citation: Suggested Citation