The Impact of Financial Sophistication on Adjustable Rate Mortgage Ownership

13 Pages Posted: 16 May 2012

See all articles by Hyrum L. Smith

Hyrum L. Smith

Utah Valley University

Michael S. Finke

The American College

Sandra J. Huston

Texas Tech University

Date Written: 2011

Abstract

The influence of a financial sophistication scale on adjustable-rate mortgage (ARM) borrowing is explored. Descriptive statistics and regression analysis using recent data from the Survey of Consumer Finances reveal that ARM borrowing is driven by both the least and most financially sophisticated households but for different reasons. Less sophisticated households are more likely to choose ARMs when they are income constrained, while more sophisticated households are more likely to choose ARMs to take advantage of higher interest rate spreads between fixed-rate mortgages and ARMs. These results highlight the importance of financial sophistication in making effective mortgage decisions and the value financial counselors and planners can provide in helping households understand the benefits and risks of ARM borrowing.

Keywords: adjustable-rate mortgages, financial sophistication, mortgage choice, Survey of Consumer Finances

Suggested Citation

Smith, Hyrum L. and Finke, Michael S. and Huston, Sandra J., The Impact of Financial Sophistication on Adjustable Rate Mortgage Ownership (2011). Journal of Financial Counseling and Planning, Vol. 22, No. 2, 2011, Available at SSRN: https://ssrn.com/abstract=2061236

Hyrum L. Smith (Contact Author)

Utah Valley University ( email )

Orem, UT UT 84058
United States
801-863-8473 (Phone)

Michael S. Finke

The American College ( email )

Bryn Mawr, PA 19010
United States

Sandra J. Huston

Texas Tech University ( email )

2500 Broadway
Lubbock, TX 79409
United States

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