Why Do Borrowers Choose Adjustable-Rate Mortgages over Fixed-Rate Mortgages?: A Behavioral Investigation

Masaki Mori, Julian Diaz () and Alan J. Ziobrowski ()
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Julian Diaz: Georgia State University
Alan J. Ziobrowski: Georgia State University

International Real Estate Review, 2009, vol. 12, issue 2, 98-120

Abstract: A considerable number of U.S. borrowers still choose adjustable rate mortgages (ARMs) over fixed rate mortgages (FRMs) even when interest rates are historically very low. This study examines the psychological reasons for the popularity of ARMs by testing the Prospect theory’s reflection hypothesis. Experiments are conducted using business professionals. The results suggest that psychological factors may explain why ARM borrowers tend to ignore the associated risk factors, focusing heavily upon pricing factors when choosing mortgage type. The results also indicate that borrowers may be viewing mortgage selection as part of a positive choice; namely, acquiring a home.

Keywords: Adjustable-rate mortgage; Fixed-rate mortgage; Prospect theory; Reflection hypothesis; Experiment (search for similar items in EconPapers)
JEL-codes: L85 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (3)

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