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Choosing between Fixed- and Adjustable-Rate Mortgages: The Case of Commercial Mortgages

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  • Dhillon, Upinder
  • Sa-Aadu, J
  • Shilling, James D

Abstract

This article reports on the determinants of the ARM choice for commercial real estate projects. The theoretical literature suggests that commercial real estate projects are more likely to be financed with an adjustable-rate mortgage (ARM) if the project's income stream or value is expected to rise with inflation over time. The empirical model estimated is a structural probit probability model of the ARM choice. Our results demonstrate that commercial borrowers typically place great emphasis on relative interest-rate differentials when deciding which mortgage is best. We also find that commercial mortgage borrowers will ordinarily be reluctant to issue an ARM when the fixed interest rate is low. Copyright 1996 by Kluwer Academic Publishers

Suggested Citation

  • Dhillon, Upinder & Sa-Aadu, J & Shilling, James D, 1996. "Choosing between Fixed- and Adjustable-Rate Mortgages: The Case of Commercial Mortgages," The Journal of Real Estate Finance and Economics, Springer, vol. 12(3), pages 265-277, May.
    • Handle: RePEc:kap:jrefec:v:12:y:1996:i:3:p:265-77
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    Cited by:

    1. Posey, Lisa L. & Yavas, Abdullah, 2001. "Adjustable and Fixed Rate Mortgages as a Screening Mechanism for Default Risk," Journal of Urban Economics, Elsevier, vol. 49(1), pages 54-79, January.

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