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| The Effect of Relative Pricing on the
Fixed-Rate Mortgage Term Decision Author: Richard A. Phillips, Eric M. Rosenblatt, and James H. VanderHoff Start Page: 187 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. |
