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Why do borrowers choose ARMs over FRMs?: A behavioral investigation

Mori, M., Diaz, J. I. and Ziobrowski, A. J. (2009) Why do borrowers choose ARMs over FRMs?: A behavioral investigation. International Real Estate Review, 12 (2). pp. 98-120. ISSN 10296131

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A considerable number of U.S. borrowers still choose adjustable rate mortgages (ARMs) over fixed rate mortgages (FRMs) even when interest rates are historically very low. This study examines the psychological reasons for the popularity of ARMs by testing the Prospect theory’s reflection hypothesis. Experiments are conducted using business professionals. The results suggest that psychological factors may explain why ARM borrowers tend to ignore the associated risk factors, focusing heavily upon pricing factors when choosing mortgage type. The results also indicate that borrowers may be viewing mortgage selection as part of a positive choice; namely, acquiring a home.

Item Type:Article
Divisions:Henley Business School > Real Estate and Planning
ID Code:79278
Publisher:University of Macau

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