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

Author

Listed:
  • 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.

Suggested Citation

  • Masaki Mori & Julian Diaz III & Alan J. Ziobrowski, 2009. "Why Do Borrowers Choose Adjustable-Rate Mortgages over Fixed-Rate Mortgages? : A Behavioral Investigation," International Real Estate Review, Global Social Science Institute, vol. 12(2), pages 98-120.
    • Handle: RePEc:ire:issued:v:12:n:02:2009:p:98-120
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    References listed on IDEAS

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    Cited by:

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    2. Sung Hyun Kim, 2019. "Two-Dimensional Self-Selection of Borrowers," Korean Economic Review, Korean Economic Association, vol. 35, pages 125-161.

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    More about this item

    Keywords

    Adjustable-rate mortgage; Fixed-rate mortgage; Prospect theory; Reflection hypothesis; Experiment;
    All these keywords.

    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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