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The Flexible Mortgage: Optimal Financing of a Consumer Durable

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  • Jan K. Brueckner

Abstract

Given the recent flood of new mortgage innovations, it is natural to wonder what features a mortgage which is "optimal" from the consumer's point of view might possess. This paper investigates this issue, using optimal control theory to characterize the time profile of mortgage payments (as well as the value of the mortgage) that maximizes an intertemporal utility function. Among other things, the analysis shows that the optimal mortgage payment stream rises over time under reasonable assumptions, highlighting the non-optimality of the standard flat-payment mortgage. Copyright American Real Estate and Urban Economics Association.

Suggested Citation

  • Jan K. Brueckner, 1984. "The Flexible Mortgage: Optimal Financing of a Consumer Durable," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 12(2), pages 136-152.
  • Handle: RePEc:bla:reesec:v:12:y:1984:i:2:p:136-152
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    File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/1540-6229.00314
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    Cited by:

    1. Paul M. Taube & Don N. MacDonald, 1989. "A Note on Residential Mortgage Selection: Borrower Decisions and Inflation Expectations," Journal of Real Estate Research, American Real Estate Society, vol. 4(1), pages 73-79.
    2. Mark Doms & John Krainer, 2007. "Innovations in mortgage markets and increased spending on housing," Working Paper Series 2007-05, Federal Reserve Bank of San Francisco.

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