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Title: Pricing adjustable rate mortgage under an affordability barrier
Authors: LU JUN
Keywords: mortgage, pricing, affordability, ARM, option, prepay
Issue Date: 22-Dec-2007
Citation: LU JUN (2007-12-22). Pricing adjustable rate mortgage under an affordability barrier. ScholarBank@NUS Repository.
Abstract: Even though the current low interest rate environment, some low-income families still originate ARM to buy a house just because the initial rate of ARM is relatively lower compared with that of FRM. These low-income families have been faced with the risk of future interest rate increasing. The National Statistics Omnibus Survey (2003) suggests that more and more borrowers would react by rearranging payments or selling his house as the interest keeps on increasing. Indeed, when interest rate increases greatly, borrowers of ARM may lose their affordability for the mortgage loan. This thesis has taken borrower affordability into account by pricing ARM under an affordability barrier. I have found that the borrower affordability plays a critical role in the pricing of the ARM product. Since the pricing model by Kau, et al (1990, 1993) has not considered borrower affordability, this thesis can be seen as a further development.
Appears in Collections:Master's Theses (Open)

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