Why Do Borrowers Choose Adjustable-Rate Mortgages over Fixed-Rate Mortgages? : A Behavioral Investigation
Author
Start Page / End Page
Volume
Issue Number
Year
Publication
Masaki Mori, Julian Diaz III and Alan J. Ziobrowski
98 / 120
12
2
2009
International Real Estate Review
Abstract
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.