Paying Too Much? Borrower Sophistication and Overpayment in the US Mortgage Market

93 Pages Posted: 5 Mar 2024

See all articles by Neil Bhutta

Neil Bhutta

Federal Reserve Bank of Philadelphia

Andreas Fuster

École Polytechnique Fédérale de Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Aurel Hizmo

Board of Governors of the Federal Reserve System

Multiple version iconThere are 3 versions of this paper

Date Written: March 1, 2024

Abstract

Comparing mortgage rates that borrowers obtain to rates that lenders could offer for the same loan, we find that many homeowners significantly overpay for their mortgage, with overpayment varying across borrower types and with market interest rates. Survey data reveal that borrowers' mortgage knowledge and shopping behavior strongly correlate with the rates they secure. We also document substantial variation in how expensive and profitable lenders are, without any evidence that expensive loans are associated with a better borrower experience. Despite many lenders operating in the US mortgage market, limited borrower sophistication may provide lenders with market power.

Suggested Citation

Bhutta, Neil and Fuster, Andreas and Hizmo, Aurel, Paying Too Much? Borrower Sophistication and Overpayment in the US Mortgage Market (March 1, 2024). Swiss Finance Institute Research Paper No. 24-21, Available at SSRN: https://ssrn.com/abstract=4747318 or http://dx.doi.org/10.2139/ssrn.4747318

Neil Bhutta

Federal Reserve Bank of Philadelphia ( email )

10 Independence Mall
Philadelphia, PA 19106
United States

Andreas Fuster (Contact Author)

École Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Chamberonne
Bâtiment Extranef
CH-1015 Lausanne
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Aurel Hizmo

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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