Financial Illiteracy and Mortgage Refinancing Decisions

Posted: 15 Aug 2018 Last revised: 30 Aug 2018

See all articles by Massimiliano Barbi

Massimiliano Barbi

University of Bologna - Department of Management

Emanuele Bajo

University of Bologna - Department of Economics

Date Written: August 1, 2018

Abstract

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

Barbi, Massimiliano and Bajo, Emanuele, Financial Illiteracy and Mortgage Refinancing Decisions (August 1, 2018). Journal of Banking and Finance, Vol. 94, pp. 279-296, 2018. Available at SSRN: https://ssrn.com/abstract=3224155

Massimiliano Barbi (Contact Author)

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/

Emanuele Bajo

University of Bologna - Department of Economics ( email )

Bologna
Italy

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