As noted last week, borrowers often make costly transactional mistakes because they know less than the loan providers they deal with, who are motivated to exploit their information advantage. A borrower who pays 5 percent when she could have gotten 4.875 percent if she had known what her loan provider knew has made a transactional mistake.

Borrowers make lifestyle mistakes for the same reason, and also because lifestyle decisions are often complicated, and borrowers tend to overweight short-term benefits and underweight long-term costs. A borrower who refinances to reduce her payment at the cost of owing substantially more after five years may have made a very costly lifestyle mistake.

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