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Why Do Borrowers Choose Adjustable-Rate Mortgages over Fixed-Rate Mortgages? : A Behavioral Investigation

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Author Info

  • Masaki Mori

    ()
    (International University of Japan)

  • Julian Diaz III

    ()
    (Georgia State University)

  • Alan J. Ziobrowski

    ()
    (Georgia State University)

Abstract

A considerable number of U.S. borrowers still choose adjustable rate mortgages (ARMs) over fixed rate mortgages (FRMs) even when interest rates are historically very low. This study examines the psychological reasons for the popularity of ARMs by testing the Prospect theory’s reflection hypothesis. Experiments are conducted using business professionals. The results suggest that psychological factors may explain why ARM borrowers tend to ignore the associated risk factors, focusing heavily upon pricing factors when choosing mortgage type. The results also indicate that borrowers may be viewing mortgage selection as part of a positive choice; namely, acquiring a home.

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Bibliographic Info

Article provided by Asian Real Estate Society in its journal International Real Estate Review.

Volume (Year): 12 (2009)
Issue (Month): 2 ()
Pages: 98-120

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Handle: RePEc:ire:issued:v:12:n:02:2009:p:98-120

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Postal: Asia Real Estate Society, 51 Monroe Street, Plaza E-6, Rockville, MD 20850, USA
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Web page: http://www.asres.org/

Order Information:
Postal: Asian Real Estate Society, 51 Monroe Street, Plaza E-6, Rockville, MD 20850, USA
Email:
Web: http://www.asres.org/

Related research

Keywords: Adjustable-rate mortgage; Fixed-rate mortgage; Prospect theory; Reflection hypothesis; Experiment;

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References

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  1. Thomas Dohmen & Armin Falk & David Huffman & Uwe Sunde & Jürgen Schupp & Gert G. Wagner, 2005. "Individual Risk Attitudes: New Evidence from a Large, Representative, Experimentally-Validated Survey," Discussion Papers of DIW Berlin 511, DIW Berlin, German Institute for Economic Research.
  2. Joao Cocco & John Campbell, 2004. "Household Risk Management and Optimal Mortgage Choice," Econometric Society 2004 North American Winter Meetings 632, Econometric Society.
  3. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  4. Richard A. Phillips & James H. VanderHoff, 1994. "Alternative Mortgage Instruments, Qualification Constraints and the Demand for Housing: An Empirical Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(3), pages 453-477.
  5. Dhillon, Upinder S & Shilling, James D & Sirmans, C F, 1987. "Choosing between Fixed and Adjustable Rate Mortgages: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(2), pages 260-67, May.
  6. Brent W. Ambrose & Michael LaCour-Little & Zsuzsa R. Huszar, 2005. "A Note on Hybrid Mortgages," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 33(4), pages 765-782, December.
  7. James VanderHoff, 1996. "Adjustable and Fixed Rate Mortgage Termination, Option Values and Local Market Conditions: An Empirical Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 24(3), pages 379-406.
  8. Jan K. Brueckner, 1993. "Why Do We Have ARMs?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 21(3), pages 333-345.
  9. David Leece, 2001. "Regressive Interest Rate Expectations and Mortgage Instrument Choice in the United Kingdom Housing Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 29(4), pages 589-613.
  10. Jones, Steven T. & Miller, Norman G. & Riddiough, Timothy J., 1995. "Residential Mortgage Choice: Does the Supply Side Matter?," Journal of Housing Economics, Elsevier, vol. 4(1), pages 71-90, March.
  11. Julian Diaz & Marvin L. Wolverton, 1998. "A Longitudinal Examination of the Appraisal Smoothing Hypothesis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 26(2), pages 349-358.
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