Understanding Excess Repayment

Abstract

Twenty-two percent of U.S. households partially prepay their mortgage each month, a practice known as curtailment in the mortgage industry. For mortgages with interest rates below the risk-free rate, curtailment has negative net present value. We show that interest rate increases in 2022 led to $1.2 billion in curtailment losses from January 2022-February 2023, due to the rising share of mortgages with a negative rate spread. Curtailment is more frequent among households with less credit card debt or those who have no credit card at all and is correlated to the availability of disposable income. Interest rate increases reduce curtailment for adjustable-rate but not fixed-rate mortgages. Our findings suggest that curtailment is explained by both an aversion to debt and by household responses to changes in current cash flows.

Keywords: Household Savings, Household Borrowing

JEL Classification: D14, D15, E65, G51