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

Abstract

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 was 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. Copyright American Real Estate and Urban Economics Association.

Crime and residential mortgage default: an empirical analysis

“…This study also ®nds signi®cant diVerences in the respective intertemporal in¯uences of property crime and violent crime on the default decision. Our estimates, consequently, constitute a signi®cant addition both to the literature on the option value of mortgage default, as represented by Kau et al (1993), VanderhoV (1996, Capozza et al (1998) and Jones and Nickerson (2001), as well as to the numerous empirical studies alternatively emphasizing demographic determinants of default, such as Quercia et al (1995).…”

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

“…Nevertheless the ARM is generally attractive even for risk-averse borrower. VanderHoff (1996) gives some insight to the importance of the prepayment in FRM versus ARM. He found that option is used when it is not in-the-money, but that the use of the option is linked to the personal life cycle imperative.…”

The Rate Decision: Adjustable vs Fixed Rate Mortgages

“…Instead researchers have concentrated on such topics as the optimal refinancing strategy (Chin and Ling 1989), the determinants of prepayment (Vanderhoff, 1996), the probability of a particular mortgage being paid off in any given year (Green and Shovan, 1996), and the role of initial discounts in the pricing of ARMs (Sprecher and Willman, 2000).…”