Home  Journals  Finance and Credit  7(391) - 2010 February

Impact of the mortgage rate type on the probability of mortgage default

Available online: 24 February 2010

Subject Heading: Hypothecary crediting

JEL Classification: 

The present work analyses the influence of mortgage rate type on the probability of mortgage default using the reduced Crawford and Rosenblatt formalization of the default decision presented in Monte Carlo based contingent claims framework.
     It is concluded that whether the rate type is set to fixed, floating or adjustable it provides great impact on the probability of mortgage default. While the floating rate predictably provides the least default probability, the adjustable rate surprisingly shows the probability of default very close to that of fixed one unless the case of sufficient transactional costs is considered.

Keywords: mortgage, ARM, default option, simulation

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ISSN 2311-8709 (Online)
ISSN 2071-4688 (Print)

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