Well ARMed and FiRM: diversification of mortgage loans for homebuyers

Kourosh M. Rasmussen and Stavros A. Zenios

Journal of Risk

Abstract: ABSTRACT Individual homebuyers today are offered a wide range of mortgage options for financing the purchase of a house. Usually, homebuyers are also granted an option to repay the mortgage loan and in some countries (such as Denmark) it is particularly efficient to do so as market conditions change or the homebuyer’s situation warrants it. While, traditionally, a single mortgage loan would serve borrower needs, today it appears that a portfolio of loans may satisfy the mortgage needs of the individual and their appetite for risk much better. In this paper we develop a model for the diversification of mortgage loans of a homebuyer and apply it to data from the Danish market. Even in the presence of mortgage origination costs, it is shown that most risk-averse homebuyers will do well to consider a diversified portfolio of both fixed- and adjustable-rate mortgages (FRM and ARM). This is particularly the case if one takes, unavoidably, a long-term perspective in financing the purchase of a home through a mortgage loan.

References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.risk.net/journal-of-risk/2161049/well- ... loans-for-homebuyers (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rsk:journ4:2161049

Access Statistics for this article

More articles in Journal of Risk from Journal of Risk
Bibliographic data for series maintained by Thomas Paine (maintainer@infopro-digital.com).