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Choice of mortgage contracts: evidence from the Survey of Consumer Finances

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  • Brahima Coulibaly
  • Geng Li

Abstract

This study revisits the empirical question of the determinants of the choice between fixed and adjustable-rate mortgages using more comprehensive data from the Survey of Consumer Finances (SCF) that overcome some of the data limitations in previous studies. The results from a Logit model of mortgage choice indicate that pricing variables and affordability are important considerations. We also find that factors such as mobility expectations, income volatility, and attitudes toward financial risk largely influence mortgage choice, with more risk-averse borrowers preferring fixed-rate mortgages. For households that are less risk averse, the mortgage type choice decision is less sensitive to pricing variables and income volatility, and affordability factors are not significant. These findings provide empirical support that underscore the importance of attitudes toward risks in mortgage choice.

Suggested Citation

  • Brahima Coulibaly & Geng Li, 2007. "Choice of mortgage contracts: evidence from the Survey of Consumer Finances," Finance and Economics Discussion Series 2007-50, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2007-50
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    Cited by:

    1. Maj-Britt Nordfang & Mogens Steffensen, 2017. "Portfolio Optimization and Mortgage Choice," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 10(1), pages 1-21, January.
    2. Frank P. Stafford & Erik Hurst & Bing Chen, 2012. "Diminishing Margins: Housing Market Declines and Family Financial Responses," Working Papers wp276, University of Michigan, Michigan Retirement Research Center.
    3. Ehrmann, Michael & Ziegelmeyer, Michael, 2014. "Household Risk Management and Actual Mortgage Choice in the Euro Area," MEA discussion paper series 201406, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    4. Kathleen W. Johnson & Geng Li, 2014. "Are Adjustable-Rate Mortgage Borrowers Borrowing Constrained?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(2), pages 457-471, June.
    5. Mariacristina Uberti & Simone Landini & Simone Casellina, 2014. "Adjustable and fixed interest rates mortgage markets modelling," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 22(2), pages 391-406, June.
    6. Cristian Badarinza & John Y. Campbell & Tarun Ramadorai, 2014. "What Calls to ARMs? International Evidence on Interest Rates and the Choice of Adjustable-Rate Mortgages," NBER Working Papers 20408, National Bureau of Economic Research, Inc.
    7. repec:mea:meawpa:14283 is not listed on IDEAS
    8. repec:ksa:szemle:1724 is not listed on IDEAS
    9. Martin Brown & Benjamin Suman Guin, 2015. "The Exposure of Mortgage Borrowers to Interest Rate Risk and House Price Risk – Evidence from Swiss Loan Application Data," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 151(II), pages 3-37, June.
    10. Söderberg, Inga-Lill & Wester, Misse, 2012. "Lay actions in the face of crisis—Swedish citizens’ actions in response to the global financial crisis of 2008," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 41(6), pages 796-805.
    11. Michael Seiler, 2014. "The Effect of Perceived Lender Characteristics and Market Conditions on Strategic Mortgage Defaults," The Journal of Real Estate Finance and Economics, Springer, vol. 48(2), pages 256-270, February.
    12. Furlong, Frederick T. & Takhtamanova, Yelena & Lang, David, 2016. "Mortgage Choice: Interactive Effects of House Price Appreciation and Mortgage Pricing Components," Working Paper Series 2016-28, Federal Reserve Bank of San Francisco.
    13. Geng Li & Paul A. Smith, 2008. "Borrowing from yourself: 401(k) loans and household balance sheets," Finance and Economics Discussion Series 2008-42, Board of Governors of the Federal Reserve System (U.S.).
    14. Landini, Simone & Uberti, Mariacristina & Casellina, Simone, 2015. "Italian mortgage markets and their dynamics," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 108(C), pages 245-259.
    15. Steinbuks, Jevgenijs, 2015. "Effects of prepayment regulations on termination of subprime mortgages," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 445-456.
    16. Ruben Cox & Dirk Brounen & Peter Neuteboom, 2015. "Financial Literacy, Risk Aversion and Choice of Mortgage Type by Households," The Journal of Real Estate Finance and Economics, Springer, vol. 50(1), pages 74-112, January.
    17. Furlong, Frederick T. & Takhtamanova, Yelena & Lang, David, 2014. "Mortgage Choice in the Housing Boom: Impacts of House Price Appreciation and Borrower Type," Working Paper Series 2014-5, Federal Reserve Bank of San Francisco, revised Mar 2014.
    18. Brown, Martin & Guin, Benjamin, 2015. "The Exposure of Mortgage Borrowers to Interest Rate Risk, Income Risk and House Price Risk – Evidence from Swiss Loan Application Data," Working Papers on Finance 1509, University of St. Gallen, School of Finance.

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    Keywords

    Mortgage loans ; Consumer behavior;

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