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Taxes, Points and Rationality in the Mortgage Market

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  • James B. Kau
  • Donald Keenan

Abstract

This paper addresses the issue of why discount points exist in the mortgage market. In the process of resolving these questions, a number of insights into the mortgage market are achieved. An important principle is that changes in loan structure due to points, prepayments or other deviations in the typical mortgage have no impact on the competitive rate of return. Thus, the essential role of points is not to raise the effective rate of return nor are they the purchase price a risk‐averter desires for an option to prepay. Instead it is taxes that play the critical role.

Suggested Citation

  • James B. Kau & Donald Keenan, 1987. "Taxes, Points and Rationality in the Mortgage Market," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 15(3), pages 168-184, September.
    • Handle: RePEc:bla:reesec:v:15:y:1987:i:3:p:168-184
    DOI: 10.1111/1540-6229.00426
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    Cited by:

    1. Agarwal, Sumit & Ben-David, Itzhak & Yao, Vincent, 2017. "Systematic mistakes in the mortgage market and lack of financial sophistication," Journal of Financial Economics, Elsevier, vol. 123(1), pages 42-58.
    2. Yan Chang & Abdullah Yavas, 2009. "Do Borrowers Make Rational Choices on Points and Refinancing?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 37(4), pages 635-658, December.
    3. 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.

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