A Simulation Approach to the Choice Between Fixed and Adjustable Rate Mortgages

Authors

  • William K. Templeton Butler University, 4600 Sunset Avenue, Indianapolis, IN 46208.
  • Robert S. Main Butler University, 4600 Sunset Avenue, Indianapolis, IN 46208.
  • J. B. Orris Butler University, 4600 Sunset Avenue, Indianapolis, IN 46208.

DOI:

https://doi.org/10.1016/S1057-0810(96)90004-9

Abstract

This study uses a simulation approach to model the choice between a fixed rate mort- gage (FRM} and an adjustable rate mortgage (ARM). Our simulations help assess the risks and benefits of choosing an ARM rather than a FRM. We represent the risk of the ARM with distributions of present value cost differentials for a variety of mortgage life periods. We provide insight on thejinancial planning aspect by modeling the impact of mortgage rate changes on the size of payments for ARMS. The simulations yield non- intuitive results that may lead to better decision making by borrowers.

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Published

1996-12-30

Issue

Vol. 5 No. 2 (1996): Financial Services Review

Section

New Original Submission

License

Copyright (c) 1996 JAI Press Inc.

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.

Author(s) retain copyright and grant the Journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution-NonCommercial 4.0 International License that allows to share the work with an acknowledgment of the work's authorship and initial publication in this Journal.

This license allows the author to remix, tweak, and build upon the original work non-commercially. The new work(s) must be non-commercial and acknowledge the original work.

How to Cite

A Simulation Approach to the Choice Between Fixed and Adjustable Rate Mortgages. (1996). Financial Services Review, 5(2), 101-117. https://doi.org/10.1016/S1057-0810(96)90004-9