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Debt Usage and Mortgage Choice: Sensitivity to Default Insurance Costs

  • Patric H. Hendershott
  • William C. LaFayette

Purchase of a house requires three interrelated household financial decisions: what level of debt to obtain, whether to select an adjustable or fixed rate mortgage (ARM or FRM) and whether to choose an FHA or a conventional loan. While some have analyzed the mortgage debt decision and the ARM/FRM choice, virtually no one has studied the FHA/conventional mortgage choice or the interrelation among the mortgage debt and instrument decisions. In our sample of 819 young home purchasers, debt and mortgage choice is driven by a need to finesse the downpayment and payment constraint ratios and to lower mortgage insurance costs.

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File URL: http://www.nber.org/papers/w5069.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5069.

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Date of creation: Mar 1995
Date of revision:
Publication status: published as Journal of Urban Economics, Vol. 41 (1997): 202-217.
Handle: RePEc:nbr:nberwo:5069
Note: PE
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  1. 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.
  2. Jones Lawrence D., 1993. "The Demand for Home Mortgage Debt," Journal of Urban Economics, Elsevier, vol. 33(1), pages 10-28, January.
  3. Capone, Charles A, Jr & Cunningham, Donald F, 1992. "Estimating the Marginal Contribution of Adjustable-Rate Mortgage Selection to Termination Probabilities in a Nested Model," The Journal of Real Estate Finance and Economics, Springer, vol. 5(4), pages 333-56, December.
  4. Follain, James R. & Ling, David C., 1991. "The Federal Tax Subsidy to Housing and the Reduced Value of the Mortgage Interest Deduction," National Tax Journal, National Tax Association, vol. 44(2), pages 147-68, June.
  5. Peter Linneman & Susan Wachter, 1989. "The Impacts of Borrowing Constraints on Homeownership," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(4), pages 389-402.
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