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The effect of financial literacy on mortgage choices

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Author Info

  • Elsa Fornero

    ()
    (University of Turin, CeRP-Collegio Carlo Alberto and Netspar)

  • Chiara Monticone

    ()
    (OECD, CeRP-Collegio Carlo Alberto, Netspar)

  • Serena Trucchi

    ()
    (University of Eastern Piedmont and CeRP-Collegio Carlo Alberto)

Abstract

A growing body of literature shows that nancial literacy a ects household savings and investment choices. Less attention has, however, been devoted to its e ect on debt behaviour. This paper contributes to lling this gap by considering how nancial literacy in uences household attitudes with respect to the most common of family debts, the house mortgage. Using Italy as a case study, it considers the e ect of nancial literacy on three mortgage-related decisions, namely, the choice of lender and the decision between adjustable and xed interest rates, as well as situations of mortgage misconduct. We nd that the more nancially literate individuals are, i) the more likely they are to shop around and compare mortgages for better economic conditions (in contrast to the less nancially literate, who tend to take on mortgages from the rst nancial intermediary they contact), ii) the more prepared they are to diversify risks by better connecting their risk exposure with different types of mortgage, and iii) the less likely they are to experience delays in repayments.

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Bibliographic Info

Paper provided by Center for Research on Pensions and Welfare Policies, Turin (Italy) in its series CeRP Working Papers with number 121.

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Length: 38 pages
Date of creation: Sep 2011
Date of revision:
Handle: RePEc:crp:wpaper:121

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References

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  1. John Y. Campbell & Joao F. Cocco, 2002. "Household Risk Management and Optimal Mortgage Choice," Harvard Institute of Economic Research Working Papers 1946, Harvard - Institute of Economic Research.
  2. John V. Duca & Anil Kumar, 2011. "Financial literacy and mortgage equity withdrawals," Working Papers 1110, Federal Reserve Bank of Dallas.
  3. Tabea Bucher-Koenen & Annamaria Lusardi, 2011. "Financial Literacy and Retirement Planning in Germany," CeRP Working Papers 109, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  4. Brueckner, Jan K & Follain, James R, 1988. "The Rise and Fall of the ARM: An Econometric Analysis of Mortgage Choice," The Review of Economics and Statistics, MIT Press, vol. 70(1), pages 93-102, February.
  5. van Rooij, Maarten & Lusardi, Annamaria & Alessie, Rob J. M., 2007. "Financial literacy and stock market participation," CFS Working Paper Series 2007/27, Center for Financial Studies (CFS).
  6. Luca Casolaro & Leonardo Gambacorta & Luigi Guiso, 2005. "Regulation, formal and informal enforcement and the development of the household loan market. Lessons from Italy," Temi di discussione (Economic working papers) 560, Bank of Italy, Economic Research and International Relations Area.
  7. Elsa Fornero & Chiara Monticone, 2011. "Financial Literacy and Pension Plan Participation in Italy," CeRP Working Papers 111, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  8. Silvia Magri & Raffaella Pico, 2010. "The rise of risk-based pricing of mortgage interest rates in Italy," Temi di discussione (Economic working papers) 778, Bank of Italy, Economic Research and International Relations Area.
  9. Maarten van Rooij & Annamaria Lusardi & Rob Alessie, 2011. "Financial Literacy, Retirement Planning, and Household Wealth," CeRP Working Papers 119, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  10. Kristopher Gerardi & Lorenz Goette & Stephan Meier, 2010. "Financial literacy and subprime mortgage delinquency: evidence from a survey matched to administrative data," Working Paper 2010-10, Federal Reserve Bank of Atlanta.
  11. Luigi Guiso & Tullio Jappelli, 2008. "Financial Literacy and Portfolio Diversification," Economics Working Papers ECO2008/31, European University Institute.
  12. Annamaria Lusardi & Olivia S. Mitchell, 2011. "Financial Literacy and Planning: Implications for Retirement Wellbeing," NBER Working Papers 17078, National Bureau of Economic Research, Inc.
  13. Jappelli, Tullio, 2010. "Economic literacy: An international comparison," CFS Working Paper Series 2010/16, Center for Financial Studies (CFS).
  14. Bucher-Koenen, Tabea & Lusardi, Annamaria, 2011. "Financial literacy and retirement planning in Germany," Journal of Pension Economics and Finance, Cambridge University Press, vol. 10(04), pages 565-584, October.
  15. Justine S. Hastings & Lydia Tejeda-Ashton, 2008. "Financial Literacy, Information, and Demand Elasticity: Survey and Experimental Evidence from Mexico," NBER Working Papers 14538, National Bureau of Economic Research, Inc.
  16. Bucks, Brian & Pence, Karen, 2008. "Do borrowers know their mortgage terms?," Journal of Urban Economics, Elsevier, vol. 64(2), pages 218-233, September.
  17. Tabea Bucher-Koenen & Annamaria Lusardi, 2011. "Financial Literacy and Retirement Planning in Germany," NBER Working Papers 17110, National Bureau of Economic Research, Inc.
  18. Bucher-Koenen, Tabea & Lusardi, Annamaria, 2011. "Financial literacy and retirement planning in Germany," MEA discussion paper series 11239, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
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Cited by:
  1. M. Fort & F. Manaresi & S. Trucchi, 2012. "Banks Information Policies, Financial Literacy and Household Wealth," Working Papers wp852, Dipartimento Scienze Economiche, Universita' di Bologna.

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