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Rotman Insights Hub | University of Toronto - Rotman School of Management

When it comes to mortgage refinancing, it pays to talk to your neighbour

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Avni Shah

Taking out a mortgage stands as a monumental financial decision, often the most significant one in a person's life. A higher interest rate over the mortgage's lifespan can substantially inflate overall costs by tens of thousands of dollars. Refinancing at the right time can lead to significant savings, especially for mortgages with extended terms, the norm in the United States. But with so much on the line, who do you turn to for advice?

Research published by Avni Shah in the Journal of the Association for Consumer Research and the Journal of Urban Economics shows that neighbours wield influence over mortgage refinancing choices. Analyzing homeownership data from Los Angeles County, California, Shah found that individuals were more inclined to refinance when a nearby neighbour had recently done so.

“Refinancing your mortgage is not like buying new car. You can't observe that your neighbour has recently refinanced,” says Shah, an assistant professor of marketing at the University of Toronto. “But there can be word of mouth. If you got a great deal by refinancing your mortgage, you might want to share that information.”

Shah and Ben McCartney of the University of Virginia conducted an analysis of data of refinancing and geographical location. They looked at refinancing decisions made by households located within 50, 100 and 250 metres of each other and identified clusters of households that refinanced, a phenomenon that diminishes over distance.

“That helped us identify this is actually social influence from the nearest neighbours,” says Shah. “We looked at one block versus the broader block, and found that households are more likely to refinance when nearby neighbours recently refinanced. That effect decays as you move further away. People are most influenced by those that live nearest, and less so by those who live even farther away — even if it’s only a little bit farther.”

Mortgage structures vary across countries, and the features of mortgages in the United States are critical to understanding Shah’s analysis. Unlike, say, Canadian or British markets, which have separate terms and amortization periods, in the U.S., mortgages often have alignment between their amortization period and mortgage term, resulting in a fixed rate for the entirety of the life of a mortgage — typically 30 years. Refinancing at a lower rate during this period can result in significant long-term savings. The challenge lies in the fact that refinancing requires breaking the mortgage contract, incurring penalties, making the potential savings less obvious. This is where neighbours sharing that they’ve received a  lower interest rates becomes significant.

Shah and McCartney found that while mortgage refinancing was strongly influenced by nearby neighbours, it didn't occur uniformly across all households. Race and ethnicity played a role in this financial decision, with households more influenced by neighbours of the same race. In more diverse neighbourhoods, there was still a statistical relationship between neighbours of different backgrounds. However, in homogenous minority neighbourhoods, refinancing decisions were less influenced by neighbours of different races and ethnicities and occurred less frequently overall.

“If, say, there are three Black families in one neighborhood, and the rest of the neighbourhood is white, they get the benefits of social encouragement to refinance,” says Shah. “But when an Asian family or a Black family live in more homogenous neighbourhoods, we do not see as much refinancing. And even if you do refinance, the effect is not as strong. People might be newer to home ownership, and it might not be as easy for those who do refinance to share that information with their peers. You might not even be able to even talk to your peers in some areas, just because there are fewer opportunities. And because there can be long-term financial benefits associated with mortgage refinancing, this can propagate existing inequalities.”

With more than 9.8 million residents, Los Angeles County is the most populous county in the United States, and keeps homeownership data that is detailed, precise and comprehensive. And Shah and McCartney’s analysis showed that even in a place known for urban sprawl and gated communities, personal connections matter.

“This research dealt with data from before the pandemic, and at the time, a lot of people were saying that the influence of social media really diminishes the value of our neighbourhood communities,” says Shah. “But neighbourhoods are something we share in common. When you go out to shovel snow or walk to the park, and you run into your neighbours. One question we had was whether social interactions still have a meaningful impact. And they do.”

Avni Shah is an assistant professor of marketing in the department of management at the University of Toronto Scarborough, with a cross-appointment to the Rotman School of Management .