The Loan Structure And Housing Tenure Decisions In An Equilibrium Model Of Mortgage Choice

The objective of this paper is to understand how loan structure a¤ects (i) the borrower's selection of a mortgage contract and (ii) the aggregate economy.We develop a quantitative equilibrium theory of mortgage choice where households can choose from a menu of long-term (nominal) mortgage loans.The model accounts for observed patterns in housing consumption, ownership, and portfolio allocations.We …nd that the loan structure is a quantitatively signi…cant factor in a household's housing …nance decision.The model suggests that the mortgage structure preferred by a household is dependent on age and income and that loan products with low initial payments o¤er an alternative to mortgages with no downpayment.These e¤ects are more important when in ‡ation is low.The presence of in ‡ation reduces the real value of the mortgage payment and the outstanding loan overtime reducing mobility.Changes in the structure of mortgages have implications for risk sharing.