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

Author

Listed:
  • 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)

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

  • Neil Bhutta & Andreas Fuster & Aurel Hizmo, 2024. "Paying Too Much? Borrower Sophistication and Overpayment in the US Mortgage Market," Swiss Finance Institute Research Paper Series 24-21, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2421
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