Getting this item's online copy...
Find a copy in the library
Getting this item's location and availability...
Find it in libraries globally
|Material Type:||Document, Internet resource|
|Document Type:||Internet Resource, Computer File|
|All Authors / Contributors:||
John Y Campbell; João F Cocco; National Bureau of Economic Research.
|Description:||1 online resource (47,  pages) : illustrations.|
|Series Title:||Working paper series (National Bureau of Economic Research), no. 9759.|
|Responsibility:||John Y. Campbell, Joao F. Cocco.|
Abstract: A typical household has a home mortgage as its most significant financial contract. The form of this contract is correspondingly important. This paper studies the choice between a fixed-rate (FRM) and an adjustable-rate (ARM) mortgage. In an environment with uncertain inflation, a nominal FRM has risky real capital value whereas an ARM has a stable real capital value. However an ARM can increase the short-term variability of required real interest payments. This is a disadvantage of the ARM for a household that faces borrowing constraints and has only a small buffer stock of financial assets. The paper uses numerical methods to solve a life-cycle model with risky labor income and borrowing constraints, under alternative assumptions about available mortgage contracts. While an ARM is generally an attractive form of mortgage, a household with a large mortgage, risky labor income, high risk aversion, a high cost of default, and a low probability of moving is less likely to prefer an ARM. The paper also considers an inflation-indexed FRM, which removes the wealth risk of the nominal FRM without incurring the income risk of the ARM, and is therefore a superior vehicle for household risk management. The welfare gain from mortgage indexation can be very large.
Retrieving notes about this item