Debt Usage and Mortgage Choice: Sensitivity to Default Insurance Costs

Patric H. Hendershott, William C. LaFayette

NBER Working Paper No. 5069
Issued in March 1995
NBER Program(s):   PE

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.

(338 K)

Published: Journal of Urban Economics, Vol. 41 (1997): 202-217.

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