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Mortgage Choice - The Danish Case

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Abstract

In this paper we analyze the mortgage choice faced by Danish borrowers. Based on an analysis of the most popular Danish mortgage products, we argue that Adjustable-Rate Mortgages (ARM) with life time caps will combine the most attractive features from straight ARMs and callable Fixed-Rate Mortgages (FRM). Furthermore, we find the delivery option embedded in Danish mortgages to be an important feature, which protects households from the risk of insolvency by facilitating a closer match between assets and liabilities in the household portfolio.

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  • Svenstrup, Mikkel, 2002. "Mortgage Choice - The Danish Case," Finance Working Papers 02-22, University of Aarhus, Aarhus School of Business, Department of Business Studies.
    • Handle: RePEc:hhb:aarfin:2002_022
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    1. Dhillon, Upinder S & Shilling, James D & Sirmans, C F, 1987. "Choosing between Fixed and Adjustable Rate Mortgages: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 19(2), pages 260-267, May.
    2. John Y. Campbell & João F. Cocco, 2003. "Household Risk Management and Optimal Mortgage Choice," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(4), pages 1449-1494.
    3. John C. Cox & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2005. "A Theory Of The Term Structure Of Interest Rates," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 5, pages 129-164, World Scientific Publishing Co. Pte. Ltd..
    4. Stanton, Richard & Wallace, Nancy, 1999. "Anatomy of an ARM: The Interest-Rate Risk of Adjustable-Rate Mortgages," The Journal of Real Estate Finance and Economics, Springer, vol. 19(1), pages 49-67, July.
    5. LeRoy, Stephen F, 1996. "Mortgage Valuation under Optimal Prepayment," The Review of Financial Studies, Society for Financial Studies, vol. 9(3), pages 817-844.
    6. Søren Nielsen & Rolf Poulsen, 2002. "Planning Your Own Debt," European Financial Management, European Financial Management Association, vol. 8(2), pages 193-210, June.
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    8. Richard Stanton & Nancy Wallace, 1998. "Mortgage Choice: What's the Point?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 26(2), pages 173-205, June.
    9. 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.
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    Keywords

    Mortgage; Choice; Valuation; Delivery Option; Prepayment;
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