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Equilibrium mortgage choice and housing tenure decisions with refinancing

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  • Matthew Chambers
  • Carlos Garriga
  • Don Schlagenhauf

Abstract

The last decade has brought about substantial mortgage innovation and increased refinancing. The objective of the paper is to understand the determinants and implications of mortgage choice in the context of general equilibrium model with incomplete markets. The equilibrium characterization allows us to study the impact of mortgage financing = decisions in the productive economy. We show the influence of different contract characteristics such as the downpayment requirement, repayment structure, and the amortization schedule for mortgage choice. We find that loan products that allow for low or no downpayment or an increasing repayment schedule increase the participation of young and lower income households. We find evidence that the volume of housing transactions increase when the payment profile is increasing and households have little housing equity. In contrast, we show that loans that allow for a rapid accumulation of home equity can still have positive participation effects without increasing the volatility of the housing market. The model predicts that the expansion of mortgage contracts and refinancing improves risk sharing opportunities for homeowners but the magnitude varies with each contract.

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2007-049.

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Date of creation: 2007
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Handle: RePEc:fip:fedlwp:2007-049

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Keywords: Mortgage loans ; Housing - Finance;

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References

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Cited by:
  1. Sophocles Brissimis & Thomas Vlassopoulos, 2009. "The Interaction between Mortgage Financing and Housing Prices in Greece," The Journal of Real Estate Finance and Economics, Springer, Springer, vol. 39(2), pages 146-164, August.
  2. Yongqiang Chu, 2014. "Credit constraints, inelastic supply, and the housing boom," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(1), pages 52-69, January.

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