The Enduring Effects of Interest Rates at Mortgage Origination

Modest differences in the interest rate at home purchase can have long-lasting effects on mortgagors. We use within-year variation in average interest rates at loan origination to instrument for contracted mortgage rates. For homeowners with negative equity, a 50bp increase in the national rate at origination leads to an increase in defaults of 10-20% of the sample average, but the instrument is not correlated with worse credit. Consistent with liquidity constraints, the magnitude is constant across many different levels of negative equity. During the boom, lower interest rates result in increased consumption of non-durables and services, while total expenditure is unchanged.