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

  • Masaki Mori

    ()

    (International University of Japan)

  • Julian Diaz III

    ()

    (Georgia State University)

  • Alan J. Ziobrowski

    ()

    (Georgia State University)

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.

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Article provided by Asian Real Estate Society in its journal International Real Estate Review.

Volume (Year): 12 (2009)
Issue (Month): 2 ()
Pages: 98-120

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Handle: RePEc:ire:issued:v:12:n:02:2009:p:98-120
Contact details of provider: Postal: Asia Real Estate Society, 51 Monroe Street, Plaza E-6, Rockville, MD 20850, USA
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  1. Jones, Steven T. & Miller, Norman G. & Riddiough, Timothy J., 1995. "Residential Mortgage Choice: Does the Supply Side Matter?," Journal of Housing Economics, Elsevier, vol. 4(1), pages 71-90, March.
  2. Dohmen, Thomas J & Falk, Armin & Huffman, David & Schupp, Jürgen & Sunde, Uwe & Wagner, Gert Georg, 2006. "Individual Risk Attitudes: New Evidence from a Large, Representative, Experimentally-Validated Survey," CEPR Discussion Papers 5517, C.E.P.R. Discussion Papers.
  3. Joao Cocco & John Campbell, 2004. "Household Risk Management and Optimal Mortgage Choice," Econometric Society 2004 North American Winter Meetings 646, Econometric Society.
  4. Julian Diaz & Marvin L. Wolverton, 1998. "A Longitudinal Examination of the Appraisal Smoothing Hypothesis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 26(2), pages 349-358.
  5. Richard A. Phillips & James H. VanderHoff, 1994. "Alternative Mortgage Instruments, Qualification Constraints and the Demand for Housing: An Empirical Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(3), pages 453-477.
  6. 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.
  7. Jan K. Brueckner, 1993. "Why Do We Have ARMs?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 21(3), pages 333-345.
  8. James VanderHoff, 1996. "Adjustable and Fixed Rate Mortgage Termination, Option Values and Local Market Conditions: An Empirical Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 24(3), pages 379-406.
  9. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  10. Brent W. Ambrose & Michael LaCour-Little & Zsuzsa R. Huszar, 2005. "A Note on Hybrid Mortgages," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 33(4), pages 765-782, December.
  11. David Leece, 2001. "Regressive Interest Rate Expectations and Mortgage Instrument Choice in the United Kingdom Housing Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 29(4), pages 589-613.
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