Adjustable- versus Fixed-Rate Mortgage Choice: The Role of Initial Rate Discounts

This paper investigates relative pricing determinants of the fixed-rate mortgage (FRM) versus adjustable-rate mortgage (ARM) decision. A probit model is estimated using data from a national sample of residential housing transactions for the 1986 and 1988 period. The results suggest that the probability of ARM choice is highly sensitive to ARM initial rate ("teaser") discounts and differences in the ratio of FRM to ARM points. In addition, the findings indicate that the level of local housing prices is an important determinant of ARM choice.