The Impact of Initial-Year Discounts on Arm Prepayments

This study uses new data on the rate of prepayment on conventional single-family adjustable-rate mortgages (ARMs) that originated between 1983 and 1986 to determine if ARMs with and without initial-year discounts have the same probability of paying off. The new data are from a large national private mortgage insurer in the United States. Each loan is tracked from its origination date through prepayment or the end of 1991. Nonparametric test statistics are used to test for differences in these prepayment rates. The findings suggest that ARMs with initial-year discounts are paid off at a rate that is essentially no different from the rate on otherwise comparable ARMs without initial-year discounts