ARM OR FRM: WHICH MORTGAGE CONTRACT IS BETTER FOR CZECH HOUSEHOLDS?
||Rybar, Ivan; Petr Zemcik
||ARM OR FRM: WHICH MORTGAGE CONTRACT IS BETTER FOR CZECH HOUSEHOLDS?
||Book of Abstracts: 15th Annual European Real Estate Society Conference in Kraków, Poland
||Household housing decisions are usually taken early in life and therefore have significant welfare consequences. There are two types of loans available for households: Fixed-rate mortgage (FRM) contracts and adjustable-rate mortgage (ARM) contracts. We investigate the welfare effects of fixed-rate and adjustable-rate mortgage contracts on Czech households by calibrating and solving a life-cycle model used for this purpose by Campbell and Cocco (2003). We compare the distribution of utility in simulations under FRM and ARM and find that FRM is preferred to ARM. This result is in conflict with findings that Campbell and Cocco (2003) report for U.S. households, probably due to higher inflation and real interest rate uncertainty in the Czech Republic.
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