Household Risk Management And Optimal Mortgage Choice
This paper asks how a household should choose between a fixed-rate (FRM) and an adjustable-rate (ARM) mortgage. In an environment with uncertain inflation a nominal FRM has a risky real capital value, whereas an ARM has a stable real capital value but short-term variability in required real payments. Numerical solution of a life-cycle model with borrowing constraints and income risk shows that an ARM is generally attractive, but less so for a risk-averse household with a large mortgage, risky income, high default cost, or low moving probability. An inflation-indexed FRM can improve substantially on standard nominal mortgages. © 2001 the President and Fellows of Harvard College and the Massachusetts Institute of Technology
Year of publication: |
2003
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Authors: | Campbell, John Y. ; Cocco, Joao F. |
Published in: |
The Quarterly Journal of Economics. - MIT Press. - Vol. 118.2003, 4, p. 1449-1494
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Publisher: |
MIT Press |
Saved in:
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