A Simulation Approach to the Choice Between Fixed and Adjustable Rate Mortgages

Templeton, William K.; Main, Robert S.; Orris, J. Burdeane

doi:10.1016/s1057-0810(96)90004-9

Cited by 6 publications

(4 citation statements)

References 9 publications

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“…The married couple and co-borrower could be assimilated to risk aversion that was included in the research that followed. Some studies (Brueckner and Follain, 1988, Sa-Aadu and Sirmans, 1995, Templeton, 1996 found that the main determinants of the choice of ARM vs. FRM were the level of income, the mobility of the borrower, and the likelihood of a rise in the ARM. Brueckner and Follain (1988) also underline that the most important determinants of the choice are not related to borrower characteristics, but to external factors such as the likelihood of the ARM to rise.…”

Section: Section 2: Discussionmentioning

confidence: 99%

Assessment of fixed rate mortgage implied insurance cost: Method and ex-post Swiss market analysis

Bélanger¹

2012

Proceedings of the 19th Annual European Real Estate Society Conference - Edinburgh, Scotland

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Section: Section 2: Discussionmentioning

confidence: 99%

Assessment of fixed rate mortgage implied insurance cost: Method and ex-post Swiss market analysis

Bélanger¹

2012

Proceedings of the 19th Annual European Real Estate Society Conference - Edinburgh, Scotland

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“…From the borrower's perspective, a wide and positive term spread makes locking into a mortgage rate very costly. Smith [1987] and Templeton et al [1996] show that an ARM is then more favorable. 4 However, the ARM rate varies with the volatile market rate of interest and puts the borrower at interest rate risk.…”

Section: The Contract Term From the Borrower And Lender Perspectivementioning

confidence: 99%

Interest Rate Risk, Term Spreads, and the Mortgage Contract Term

Steininger¹,

Sturm²

2019

26th Annual European Real Estate Society Conference

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Borrowers of a mortgage can choose between fully bearing the interest rate chance risk and paying a term spread to be protected against fluctuating mortgage rates. By using a one-period model, we study the choice between a fully adjustable mortgage and a fully fixed-rate mortgage. Furthermore, we examine with a life cycle model whether a mortgage is best broken down into several shortto-medium-term FRMs -a common form in various mortgage markets but only rarely analyzed in research. We are among the first to demonstrate that borrowers with high risk aversion, nonamortizing mortgages, a large mortgage, and a low probability of moving are better off with long-term contracts. Our results show that amortizing mortgages are best broken down into several contracts with the optimal contract term generally declining as the mortgage ages. Initial contracts may be shorter than following contracts, only if borrowers expect to benefit from decreasing interest rates.For non-amortizing mortgages, a fully FRM is superior, unless interest rates are expected to decrease significantly.

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“…For our ex ante analysis, we simulate future 1-year Treasury and 30-year FRM rates similarly to Tucker (1991) and Templeton et al (1996). Detailed methodology and simulation results are documented in appendix A1.…”

Section:   mentioning

confidence: 99%