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The Borrower's Choice between Fixed and Adjustable Rate Loan Contracts

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  • Donald J. Smith

Abstract

Previous research indicates that key variables in the choice between fixed and price index‐linked debt are the covariances between inflation and real income and between inflation and the real value of the asset financed by the debt. This model extends those results to adjustable rate loan contracts and examines the impact of covariance between the real interest rate and, in turn, real income and real asset values. Positive (negative) covariance between those terms shifts preference toward the adjustable (fixed) loan contract.

Suggested Citation

  • Donald J. Smith, 1987. "The Borrower's Choice between Fixed and Adjustable Rate Loan Contracts," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 15(2), pages 110-116, June.
    • Handle: RePEc:bla:reesec:v:15:y:1987:i:2:p:110-116
    DOI: 10.1111/1540-6229.00422
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    Cited by:

    1. Ahn, Kwangwon & Forsyth, Joetta & Jang, Hanwool & Kim, Dongshin, 2022. "Fixed rate mortgages: The cost of interest rate risk aversion," Finance Research Letters, Elsevier, vol. 44(C).
    2. Brahima Coulibaly & Geng Li, 2009. "Choice of Mortgage Contracts: Evidence from the Survey of Consumer Finances," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 37(4), pages 659-673, December.
    3. Philippe Bélanger, 2012. "Assessment of fixed rate mortgage implied insurance cost: Method and ex-post Swiss market analysis," ERES eres2012_372, European Real Estate Society (ERES).
    4. Paul M. Taube & Don N. MacDonald, 1989. "A Note on Residential Mortgage Selection: Borrower Decisions and Inflation Expectations," Journal of Real Estate Research, American Real Estate Society, vol. 4(1), pages 73-79.
    5. Mona J. Gardner & Han Bin Kang & Dixie L. Mills, 1987. "Consumer Profiles and Acceptance of ARM Features: An Application of Logit Regression," Journal of Real Estate Research, American Real Estate Society, vol. 2(2), pages 63-74.

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