Debt Usage and Mortgage Choice: Sensitivity to Default Insurance Costs
Patric H. Hendershott, William C. LaFayette
NBER Working Paper No. 5069
Purchase of a house requires three interrelated household financial decisions: what level of debt to obtain, whether to select an adjustable or fixed rate mortgage (ARM or FRM) and whether to choose an FHA or a conventional loan. While some have analyzed the mortgage debt decision and the ARM/FRM choice, virtually no one has studied the FHA/conventional mortgage choice or the interrelation among the mortgage debt and instrument decisions. In our sample of 819 young home purchasers, debt and mortgage choice is driven by a need to finesse the downpayment and payment constraint ratios and to lower mortgage insurance costs.
Published: Journal of Urban Economics, Vol. 41 (1997): 202-217.