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Adjustable and Fixed Rate Mortgage Termination, Option Values and Local Market Conditions: An Empirical Analysis

REAL ESTATE ECONOMICS, Vol. 24 No. 3
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Metric Options:   Counts1 Year3 Year

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  • Usage
    825
    • Abstract Views
      825

Paper Description

This paper analyzes the probabilities of prepayment or default for Fixed Rate Mortgages (FRMs) and Adjustable Rate Mortgages (ARMs). Using data from the period 1985-1992, the analysis indicates that the likelihood of prepayment of thirty year FRMs was determined primarily by house price appreciation and personal income growth and the likelihood of prepayment of fifteen year FRMs determined primarily by interest rate changes. ARMs were prepaid less frequently than FRMs, were less likely to be prepaid when interest rates declined and defaulted more often than FRMs. The analysis provides evidence that ARM holders are less mobile than FRM holders.

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