The Effect of Relative Pricing on the Fixed-Rate Mortgage Term Decision

Richard A. Phillips, Eric M. Rosenblatt and James VanderHoff
Additional contact information
Richard A. Phillips: Economics Old Dominion University Norfolk, Virginia 23529-0222, http://www.odu-cbpa.org/economics.htm
Eric M. Rosenblatt: Graduate School of Management Rutgers University-Newark Newark, New Jersey 07102, http://business.rutgers.edu/

Journal of Real Estate Research, 1992, vol. 7, issue 2, 187-194

Abstract: This paper analyzes determinants of the fifteen- versus thirty-year fixed-rate mortgage (FRM) loan term decision. Because the thirty-year FRM may be converted (by partial prepayment) to the shorter term, the thirty-year instrument provides the implicit option to extend repayment. Relative rates measure the price (cost) of this option to the consumer. The results indicate that the term decision of consumers is highly sensitive to relative rates: probit estimates using data from a large national lending institution for the 1987 to 1990 period indicate that a 1% increase in the ratio of fifteen- to thirty-year rates lowers the probability of fifteen-year term choice by 20%. The results also indicate that expected housing price appreciation, which measures investment determinants of housing demand, is negatively related to the fifteen-year FRM term choice.

JEL-codes: L85 (search for similar items in EconPapers)
Date: 1992
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Citations: View citations in EconPapers (1)

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