After the great recession : financial sophistication and housing leverage

ABSTRACT

US households face various choices in saving for retirement, with one of the most common decisions related to maintaining or paying off a mortgage. Using the 2010 and 2013 Survey of Consumer Finances, this study investigates the relationship between financial sophistication and mortgage decisions among middle-age households. A Heckman two-stage selection model is employed to investigate two separate decisions: mortgage holding and loan-to-value (LTV) ratios among mortgage holders. Results indicate that financial sophistication is positively associated with carrying a mortgage and higher LTV ratios. These results imply that financially sophisticated households may be using leverage to increase asset returns.

KEYWORDS:

• great recession
• financial sophistication
• mortgage
• housing leverage
• survey of consumer finances

JEL CLASSIFICATION:

• D12
• D14

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Marginal effect was calculated in STATA 13.1