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An event study in relative prices and choice of loan term

Kevin A. Park

Journal of Housing Economics, 2019, vol. 46, issue C

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.

Keywords: Mortgage; Federal Housing Administration; Insurance; Amortization (search for similar items in EconPapers)
JEL-codes: G22 G28 R21 R28 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.jhe.2019.101637

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