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Household Risk Management and Optimal Mortgage Choice

John Campbell () and João F. Cocco

The Quarterly Journal of Economics, 2003, vol. 118, issue 4, 1449-1494

Abstract: This paper asks how a household should choose between a fixed-rate (FRM) and an adjustable-rate (ARM) mortgage. In an environment with uncertain inflation a nominal FRM has a risky real capital value, whereas an ARM has a stable real capital value but short-term variability in required real payments. Numerical solution of a life-cycle model with borrowing constraints and income risk shows that an ARM is generally attractive, but less so for a risk-averse household with a large mortgage, risky income, high default cost, or low moving probability. An inflation-indexed FRM can improve substantially on standard nominal mortgages.

Date: 2003
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Working Paper: Household Risk Management and Optimal Mortgage Choice (2003) Downloads
Working Paper: Household Risk Management and Optimal Mortgage Choice (2003) Downloads
Working Paper: Household Risk Management and Optimal Mortgage Choice (2002) Downloads
Working Paper: Household Risk Management and Optimal Mortgage Choice (2002)
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