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An event study in relative prices and choice of loan term

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  • Park, Kevin A.

Abstract

Longer amortization timelines help lower the monthly cost of a home mortgage, but the longer term and interest rate premium lead to higher cumulative costs over the life of the loan. A variety of factors may influence the choice of amortization schedule, including the relative price of different loan terms. The Federal Housing Administration (FHA) reduced mortgage insurance premiums in early 2015 for mortgages with loan terms greater than 15 years, while leaving the premiums for shorter-term loans unchanged. The large, sudden change in relative prices creates a natural experiment in choice of loan term. We find that the number and share of FHA-insured mortgages with longer loan term increased after the premium reduction. Although there is some evidence of a reduction in shorter-term refinances, however, we find no evidence of a decline in shorter-term home purchase originations. That is, the change in relative prices did not cause homebuyers to substitute longer-term mortgages for shorter-term mortgages. These results have implications for the effectiveness of policies designed to encourage building equity faster through shorter-term loans.

Suggested Citation

  • Park, Kevin A., 2019. "An event study in relative prices and choice of loan term," Journal of Housing Economics, Elsevier, vol. 46(C).
    • Handle: RePEc:eee:jhouse:v:46:y:2019:i:c:s1051137717302784
    DOI: 10.1016/j.jhe.2019.101637
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    References listed on IDEAS

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    1. Edward J. Pinto & Stephen D. Oliner & Tobias Peter, 2017. "The Wealth Building Home Loan," AEI Economics Working Papers 965499, American Enterprise Institute.
    2. Kevin A. Park, 2017. "Temporary Loan Limits as a Natural Experiment in Federal Housing Administration Insurance," Housing Policy Debate, Taylor & Francis Journals, vol. 27(3), pages 449-466, May.
    3. Ernest M. Fisher, 1951. "Urban Real Estate Markets: Characteristics and Financing," NBER Books, National Bureau of Economic Research, Inc, number fish51-1.
    4. Kerry D. Vandell, 1995. "FHA Restructuring Proposals: Alternatives and Implications," Wisconsin-Madison CULER working papers 95-09, University of Wisconsin Center for Urban Land Economic Research.
    5. Richard A. Phillips & Eric M. Rosenblatt & James H. VanderHoff, 1992. "The Effect of Relative Pricing on the Fixed-Rate Mortgage Term Decision," Journal of Real Estate Research, American Real Estate Society, vol. 7(2), pages 187-194.
    6. Kevin A. Park & Joshua J. Miller, 2018. "Mortgage Choice in Rural Housing," Housing Policy Debate, Taylor & Francis Journals, vol. 28(3), pages 443-465, May.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Mortgage; Federal Housing Administration; Insurance; Amortization;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand
    • R28 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Government Policy

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