The Relative Termination Experience of Adjustable to Fixed-Rate Mortgages




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    • Department of Finance and Department of Economics, respectively, Baylor University, Waco, Texas. This research was sponsored and funded by the Federal Home Loan Mortgage Corporation (FHLMC) in cooperation with North American Mortgage Company (NAMC) of Houston, Texas, which provided the data for this study. The views and conclusions expressed herein are those of the authors and do not necessarily reflect the views of past or present employees or officers of the FHLMC or NAMC. The authors wish to express their appreciation to Michael Lea, J. T. Rose, Kerry Vandell, Peter Zorn, and an anonymous referee for their helpful comments.


Our study uses a multinomial logit model to analyze the concurrent termination experience of adjustable-rate and fixed-rate mortgages. A new set of ARM-specific interactive determinants expands the conventional FRM specification to isolate the unique termination behavior of ARMs. We find that expected rate adjustments and large lifetime caps are positively related to ARM termination probabilities while long adjustment frequencies are inversely related. Caps, both periodic and lifetime, have a secondary, inverse effect on termination probabilities when interest-rate movements exceed cap limits. The model also shows that interest-rate expectations affect FRM terminations more strongly than ARM terminations.