Household Risk Management and Optimal Mortgage Choice

By João F. Cocco, John Y. Campbell. 2003

706 citations recorded by the source corpus.

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. (This abstract was borrowed from another version of this item.)

Subfields: Accounting, Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/79d3cbda63c4e4a1f64c3ad6a2c155d9f21ed14d

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Citations in the corpus

Portfolio Choice Problems (2010, neutral): “The role of housing in portfolio choice problems is studied by Grossman and Laroque (1991), Flavin and Yamashita (2002), Cocco (2000,2004), Hu (2002), Campbell and Cocco (2003), and Yao and Zhang (2004), among others.”
Capital Regulation, Risk-Taking and Monetary Policy: A Missing Link in the Transmission Mechanism? (2008, neutral): “From this perspective, for instance, the nature of contractual arrangements, such as the balance between fixed-rate and variable-rate lending or collateral practices, acquire particular significance (BIS (1995), Borio (1997), Campbell and Cocco (2003), Tsatsaronis and Zhu (2004)).”
Labor Income Dynamics at Business-Cycle Frequencies:Implications for Portfolio Choice (2011, positive): “We use a third order polynomial for g to approximate the hump-shaped life-cycle earnings profile as in Campbell and Cocco (2003). We use as parameters for the polynomial the point estimates in Cocco, Gomes, and Maenhout (2005) for college graduates.”
The equilibrium effect of fundamentals on house prices and rents (2013, neutral): “22 See, for example, Díaz and Luengo-Prado (2008), Gervais (2002), Ríos-Rull and Sánchez-Marcos (2008) or Nakajima (2010).”
Was there a British House Price Bubble? Evidence from a Regional Panel (2006, neutral): “Further, in the US, borrowers increasingly choose adjustable-rate mortgages (Campbell and Cocco, 2003), and planning constraints have become more pervasive (Glaeser, Gyourko and Saks, 2005).”
The Loan Structure and Housing Tenure Decisions in an Equilibrium Model of Mortgage Choice (2007, neutral): “Of course, this product increases the lenders risk exposure because the borrower builds equity in the home at a slower rate than the standard contract, which may explain the lack of popularity of this product.(4) The repayment schedule depends on the growth rate of these payments.”
Mortgage Markets, Collateral Constraints, and Monetary Policy: Do Institutional Factors Matter? (2007, neutral): “In (15), the marginal utility of consumption is equated to an alternative representation of the marginal utility of housing.”
Mortgage Design in an Equilibrium Model of the Housing Market (2018, neutral): “To economize on state variables, the mortgage amortizes over its remaining life as in Campbell and Cocco (2003, 2015).”
Optimal Mortgage Design (2010, neutral): “Chari and Jagannathan (1989) consider a model with two private types of borrowers, who di¤er in terms of the riskiness of their potential gains from selling the property, and show that the optimal contract to be chosen by borrowers with larger potential gains involves contractual arrangements such a”
On the user cost and homeownership (2006, neutral): “See Campbell and Cocco (2003) if interested in optimal mortgage choice.”