A Financial Analysis of Consumer Mortgage Decisions

Buying a home is the single biggest investment decision for most Americans. Because most buyers do not have the cash to pay the purchase price upfront, they are obliged to take out mortgage loans. The result has been demand for a wide range of mortgage products to suit borrowers' varied cash flow and risk preferences. Increased choice, however, introduces complexity - choosing the right mortgage and managing it can be a challenge. Fortunately, there are well-understood tools that corporate and municipal treasurers use to manage debt and these can be adapted for homeowners managing their mortgages. Corporate treasurers are responsible for managing their firms' borrowing profiles and strategy. Just like a homebuyer, they need to decide when to borrow, how to structure debt, when to refinance debt and when to pay off debt. If they do this well, they can save their firm a lot of money; if not, the costs could be considerable. Homeowners face similar challenges in managing their home loans, and they can apply the same techniques used by corporate treasurers