Working Paper

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

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.

Keywords: Mortgage; price dispersion; consumer search; financial literacy; interest rates;

JEL Classification: G21; G53; D14; D18; D83; E43;

https://doi.org/10.21799/frbp.wp.2024.11

Bibliographic Information

Provider: Federal Reserve Bank of Philadelphia

Part of Series: Working Papers

Publication Date: 2024-06-18

Number: 24-11