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Mortgage Choice - The Danish Case

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  • Svenstrup, Mikkel

    ()
    (Department of Finance, Aarhus School of Business)

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    Abstract

    In this paper we analyze the mortgage choice faced by Danish borrowers. Based on an analysis of the most popular Danish mortgage products, we argue that Adjustable-Rate Mortgages (ARM) with life time caps will combine the most attractive features from straight ARMs and callable Fixed-Rate Mortgages (FRM). Furthermore, we find the delivery option embedded in Danish mortgages to be an important feature, which protects households from the risk of insolvency by facilitating a closer match between assets and liabilities in the household portfolio.

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    Bibliographic Info

    Paper provided by University of Aarhus, Aarhus School of Business, Department of Business Studies in its series Finance Working Papers with number 02-22.

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    Length: 25 pages
    Date of creation: 09 May 2002
    Date of revision:
    Handle: RePEc:hhb:aarfin:2002_022

    Contact details of provider:
    Postal: The Aarhus School of Business, Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark
    Fax: + 45 86 15 19 43
    Web page: http://www.asb.dk/about/departments/bs.aspx
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    Related research

    Keywords: Mortgage; Choice; Valuation; Delivery Option; Prepayment;

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    1. 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.
    2. LeRoy, Stephen F, 1996. "Mortgage Valuation under Optimal Prepayment," Review of Financial Studies, Society for Financial Studies, vol. 9(3), pages 817-44.
    3. John Y. Campbell & Joao F. Cocco, 2003. "Household Risk Management And Optimal Mortgage Choice," The Quarterly Journal of Economics, MIT Press, vol. 118(4), pages 1449-1494, November.
    4. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, vol. 53(2), pages 385-407, March.
    5. Stanton, Richard & Wallace, Nancy, 1999. "Anatomy of an ARM: The Interest-Rate Risk of Adjustable-Rate Mortgages," The Journal of Real Estate Finance and Economics, Springer, vol. 19(1), pages 49-67, July.
    6. Brueckner, Jan K & Follain, James R, 1988. "The Rise and Fall of the ARM: An Econometric Analysis of Mortgage Choice," The Review of Economics and Statistics, MIT Press, vol. 70(1), pages 93-102, February.
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