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Paying Too Much? Borrower Sophistication and Overpayment in the U.S. Mortgage Market

Author

Listed:
  • NEIL BHUTTA
  • ANDREAS FUSTER
  • AUREL HIZMO

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 U.S. mortgage market, limited borrower sophistication may provide lenders with market power.

Suggested Citation

  • Neil Bhutta & Andreas Fuster & Aurel Hizmo, 2026. "Paying Too Much? Borrower Sophistication and Overpayment in the U.S. Mortgage Market," Journal of Finance, American Finance Association, vol. 81(1), pages 49-90, February.
    • Handle: RePEc:bla:jfinan:v:81:y:2026:i:1:p:49-90
    DOI: 10.1111/jofi.70001
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    2. Alistair Macaulay, 2025. "Cyclical Attention to Saving," American Economic Journal: Macroeconomics, American Economic Association, vol. 17(4), pages 124-167, October.
    3. Ferrari, Alessandro & Loseto, Marco, 2023. "Liquidity constraints and demand for maturity the case of mortgages," Working Paper Series 2859, European Central Bank.
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    6. Steven Malliaris & Daniel A. Rettl & Ruchi Singh, 2022. "Is competition a cure for confusion? Evidence from the residential mortgage market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 50(1), pages 206-246, March.
    7. Sumit Agarwal & Yongheng Deng & Jia He & Yonglin Wang & Qi Zhang, 2023. "Lenders’ pricing strategy: Do neighborhood risks matter?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 51(4), pages 1011-1047, July.
    8. Marta Cota & Ante Sterc, 2024. "Financial Skills and Search in the Mortgage Market," CERGE-EI Working Papers wp780, The Center for Economic Research and Graduate Education - Economics Institute, Prague.
    9. Granja, João & Paixão, Nuno, 2026. "Bank consolidation and uniform pricing," Journal of Financial Economics, Elsevier, vol. 176(C).
    10. Allison Nicoletti & Christina Zhu, 2023. "Economic Consequences of Transparency Regulation: Evidence from Bank Mortgage Lending," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 61(5), pages 1827-1871, December.
    11. Mark Egan & Shan Ge & Johnny Tang, 2022. "Conflicting Interests and the Effect of Fiduciary Duty: Evidence from Variable Annuities," The Review of Financial Studies, Society for Financial Studies, vol. 35(12), pages 5334-5386.
    12. Natee Amornsiripanitch & Judith Ricks, 2025. "Incomplete Pass-Through in Mortgage Markets," Working Papers 25-30, Federal Reserve Bank of Philadelphia.
    13. Natee Amornsiripanitch, 2023. "The Age Gap in Mortgage Access," Working Papers 23-03, Federal Reserve Bank of Philadelphia.
    14. Ge Gao & Alex Nikolsko‐Rzhevskyy & Oleksandr Talavera, 2023. "Can central banks be heard over the sound of gunfire?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 46(S1), pages 183-203, December.
    15. Madeira, Carlos, 2021. "The potential impact of financial portability measures on mortgage refinancing: Evidence from Chile," Journal of International Money and Finance, Elsevier, vol. 117(C).
    16. Akos Horvath & Benjamin S. Kay, 2026. "Queuing, Service Time, and Price Dynamics in Residential Mortgage Lending," Finance and Economics Discussion Series 2026-017, Board of Governors of the Federal Reserve System (U.S.).
    17. Hadi Elzayn & Simon Freyaldenhoven & Minchul Shin, 2025. "Precision Without Labels: Detecting Cross-Applicants in Mortgage Data Using Unsupervised Learning," Working Papers 25-25, Federal Reserve Bank of Philadelphia.
    18. Chung, Sol & Agnew, Julie & Bateman, Hazel & Eckert, Christine & Liu, Junhao & Thorp, Susan, 2024. "The impact of mortgage broker use on borrower confusion and preferences," Journal of Economic Behavior & Organization, Elsevier, vol. 224(C), pages 229-247.
    19. Duc Duy Nguyen & Steven Ongena & Shusen Qi & Vathunyoo Sila, 2022. "Climate Change Risk and the Cost of Mortgage Credit [Does climate change affect real estate prices? Only if you believe in it]," Review of Finance, European Finance Association, vol. 26(6), pages 1509-1549.
    20. Alexei Alexandrov & Thomas S. Conkling & Sergei Koulayev, 2024. "Changing the Scope of GSE Loan Guarantees: Estimating Effects on Mortgage Pricing and Availability," The Journal of Real Estate Finance and Economics, Springer, vol. 69(3), pages 409-451, October.
    21. Sebastian Doerr & Andreas Fuster, 2025. "Affordable housing, unaffordable credit? Concentration and high-cost lending for manufactured homes," Swiss Finance Institute Research Paper Series 25-28, Swiss Finance Institute.
    22. Phoebe Tian & Chen Zheng, 2024. "Unintended Consequences of the Home Affordable Refinance Program," Staff Working Papers 24-11, Bank of Canada.
    23. Luis Arturo Lopez & Shawn J. McCoy & Vivek Sah, 2022. "Steering consumers to lenders in residential real estate markets," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 50(6), pages 1596-1641, November.
    24. Guiso, Luigi & Pozzi, Andrea & Tsoy, Anton & Gambacorta, Leonardo & Mistrulli, Paolo Emilio, 2022. "The cost of steering in financial markets: Evidence from the mortgage market," Journal of Financial Economics, Elsevier, vol. 143(3), pages 1209-1226.

    More about this item

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • G53 - Financial Economics - - Household Finance - - - Financial Literacy
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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