33 Pages Posted: 4 Jun 2013 Last revised: 3 Aug 2016
Date Written: August 2016
The relative popularity of adjustable-rate mortgages (ARMs) and fixed-rate mortgages (FRMs) varies considerably both across countries and over time. We ask how movements in current and expected future interest rates affect the share of ARMs in total mortgage issuance. Using a nine-country panel and instrumental variables methods, we present evidence that near-term (one-year) rational expectations of future movements in ARM rates do affect mortgage choice, particularly in more recent data since 2001. However longer-term (three-year) rational forecasts of ARM rates have a relatively weak effect, and the current spread between FRM and ARM rates also matters, suggesting that households are concerned with current interest costs as well as with lifetime cost minimization. These conclusions are robust to alternative (adaptive and survey-based) models of household expectations.
Keywords: mortgage choice, interest rate, adjustable-rate, fixed-rate, household finance, international
JEL Classification: G21, N20, R21, R31
Suggested Citation: Suggested Citation
Badarinza, Cristian and Campbell, John Y. and Ramadorai, Tarun, What Calls to ARMs? International Evidence on Interest Rates and the Choice of Adjustable-Rate Mortgages (August 2016). Available at SSRN: https://ssrn.com/abstract=2273430 or http://dx.doi.org/10.2139/ssrn.2273430