Valuing the Mortgage Borrower's Prepayment Option
AbstractThis paper investigates the value of the prepayment option that normally accompanies a fixed-rate mortgage. Using the two-state option-pricing model developed by Bartter and Rendleman, the paper presents simulations of prepayment option values using several sets of interest rate parameters. The sensitivity of the value of the option to changes in various aspects of the mortgage contract is assessed. Prepayments are not priced separately in the market from the underlying mortgage, so the paper investigates how the inclusion of a prepayment option affects the contract interest rate. Finally, there is reason to believe that any option-pricing model will overestimate the value of a mortgage prepayment option. The size of this bias is assessed indirectly and is found to be rather small. Copyright American Real Estate and Urban Economics Association.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by American Real Estate and Urban Economics Association in its journal Real Estate Economics.
Volume (Year): 13 (1985)
Issue (Month): 3 ()
Contact details of provider:
Postal: Indiana University, Kelley School of Business, 1309 East Tenth Street, Suite 738, Bloomington, Indiana 47405
Phone: (812) 855-7794
Fax: (812) 855-8679
Web page: http://www.blackwellpublishing.com/journal.asp?ref=1080-8620
More information through EDIRC
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Werner Hürlimann, 2012. "Valuation of fixed and variable rate mortgages: binomial tree versus analytical approximations," Decisions in Economics and Finance, Springer, vol. 35(2), pages 171-202, November.
- Patric H. Hendershott & Robert Van Order, 1987. "Pricing Mortgages: An Interpretation of the Models and Results," NBER Working Papers 2290, National Bureau of Economic Research, Inc.
- M. Shahid Ebrahim, 2008.
"Can an Islamic Model of Housing Finance Cooperative Elevate the Economic Status of the Underprivileged?,"
Papers on Economics of Religion
08/04, Department of Economic Theory and Economic History of the University of Granada..
- Ebrahim, M. Shahid, 2009. "Can an Islamic model of housing finance cooperative elevate the economic status of the underprivileged?," Journal of Economic Behavior & Organization, Elsevier, vol. 72(3), pages 864-883, December.
- Austin Kelly, 1994. "Capitalization of Above Market Financing - or, A Tale of 2 Condos," Urban/Regional 9412001, EconWPA, revised 23 Dec 1994.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.