Economics, Econometrics and Finance
8 years ago

Adjustable-Rate Mortgages Pose Lower Interest-Rate Risk Than Fixed-Rate Loans

Journal of Real Estate Research
Evaluating the Interest-Rate Risk of Adjustable-Rate Mortgage Loans
Raymond Finance, Thomas F. Gosnell, Andrea J. Heuson

Paper Summary

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The article evaluates the risk of adjustable-rate mortgages (ARMs) with rate adjustments and constraints. By simulating cash flows and changing parameters, it shows that ARMs have less interest-rate sensitivity than fixed-rate loans. Changes in loan terms and market conditions have little impact on ARM risk after the initial years. Lenders use these features to attract borrowers. The main factors affecting ARM risk are rate change limits and index volatility.