Household Risk Management and Optimal Mortgage Choice
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CitationCampbell, John Y., and Joao F. Cocco. 2003. Household risk management and optimal mortgage choice. Quarterly Journal of Economics 118(4): 1449-1494.
AbstractThis paper asks how a household should choose between a fixed-rate (FRM) and an adjustable-rate (ARM) mortgage. In an environment with uncertain inflation a nominal FRM has a risky real capital value, whereas an ARM has a stable real capital value but short-term variability in required real payments. Numerical solution of a life-cycle model with borrowing constraints and income risk shows that an ARM is generally attractive, but less so for a risk-averse household with a large mortgage, risky income, high default cost, or low moving probability. An inflation-indexed FRM can improve substantially on standard nominal mortgages.
Citable link to this pagehttp://nrs.harvard.edu/urn-3:HUL.InstRepos:3157876
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