Mortgage Choice†

James R. Follain

Real Estate Economics, 1990, vol. 18, issue 2, 125-144

Abstract: Mortgage choice refers to a set of problems faced by a homeowner that includes the choice of a loan‐to‐value ratio, the refinancing and default decisions, and the choice of mortgage instrument. This paper reviews much of the literature that has been written on the topic. It begins with a listing of the major stylized facts the literature seeks to explain. Models used to explain mortgage choice are categorized and discussed. It is argued that the relatively simple certainty model that incorporates liquidity constraints seems capable of explaining some of the stylized facts, but is unable to explain some others. The paper concludes with a discussion of three policy questions that require a better understanding of mortgage choice before they can be answered. The paper is based upon the author's Presidential Address to the American Real Estate and Urban Economics Association, which was delivered in Atlanta, Georgia on December 29, 1989.

Date: 1990
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