Consumer financial literacy and the efficiency of mortgage‐related decisions: New evidence from the Panel Study of Income dynamics

Abstract

This study evaluated the link between financial literacy and household mortgage decisions. To this end, the longitudinal data set for the U.S. population from the Panel Study of Income Dynamics (PSID) was used. Evidence for links between financial literacy levels and (1) mortgage uptake, (2) mortgage interest rates and (3) mortgage refinancing decisions were examined using the two waves (2015 and 2017) of PSID data, combined with the 2016 PSID supplementary questionnaire examining the measured financial literacy of household members. Our results revealed a positive link between financial literacy and mortgage possession and, additionally, between financial literacy and the subsequent decision to take out a mortgage. Moreover, higher financial literacy scores were associated with lower mortgage interests and a greater likelihood of mortgage refinancing. On average, a household that refinanced its mortgage was able to reduce its interest rate by almost 0.7 percentage points, providing evidence of the positive role of financial literacy in securing better mortgage terms.

Good credit, bad credit: The differential role of the sources of debt in life satisfaction

“…The promotion and provision of financial literacy education should be considered an important tool for increasing well-being at the onset of a credit decision. Financial literacy has been already proven to facilitate a better selection of credit products (Fornero et al 2011) and decrease the cost of debt (Bialowolski et al 2020;Gathergood and Weber 2017). Thus, it can translate into higher satisfaction with credit and consequently with life in general.…”

The forms of financial literacy overconfidence and their role in financial well‐being

“…FL was estimated, for instance, to explain about 30%-40% of retirement wealth inequality in the United States (Lusardi et al, 2017). A low level of FL was linked to sub-optimal financial decisions resulting in high-cost borrowing (Disney & Gathergood, 2013;Lusardi & Tufano, 2015;Mottola, 2013;Pak, 2018), debt accumulation (Lusardi & Tufano, 2015;Stango & Zinman, 2009), poor mortgage terms (Bialowolski et al, 2020), mortgage delinquency (Gerardi, 2010;Kim et al, 2020), late credit card payments (Hamid & Loke, 2021), and relatively low likeliness of stock market participation (Yoong, 2011).…”

Improving Debt Literacy by 2/3 Through Four Simple Infographics Requires Numeracy and Not Focusing on Negatives of Debt

“…The literature on the impact of financial literacy on credit choices and debt management behavior is more extensive. Several studies revealed that more financially literate consumers are more likely to be holders of secured debt, mostly mortgages (Disney and Gathergood, 2011;Brown and Graf, 2013;Feng et al, 2019;Bialowolski et al, 2020). Bialowolski et al (2020) provides arguments that mortgage borrowing can be considered healthy financial behavior.…”

“…Several studies revealed that more financially literate consumers are more likely to be holders of secured debt, mostly mortgages (Disney and Gathergood, 2011;Brown and Graf, 2013;Feng et al, 2019;Bialowolski et al, 2020). Bialowolski et al (2020) provides arguments that mortgage borrowing can be considered healthy financial behavior. At the same time, the correlation between financial literacy and the likelihood of holding unsecured (i.e., riskier and more costly) debt is absent (Feng et al, 2019) or negative (Brown and Graf, 2013).…”

“…Several studies have shown that more financially literate mortgage borrowers report lower mortgage interest rates (Moore, 2003;Huston, 2012;Bialowolski et al, 2020). They have also been found to be less likely to reach out for exceptionally costly borrowing vehicles, such as payday loans, auto-title loans, mail order catalog debt, pawnshop debt, etc.…”