The Optimal Mortgage Payment Path Under Price Uncertainty |
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Authors: | L. Dwayne Barney Harry White |
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Affiliation: | Assistant Professor of Economics, Boise State University, Boise, Idaho 83725.;Assistant Professor of Finance, Department of Economics and Finance, Northeast Louisiana University, Monroe, Louisiana 71209. |
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Abstract: | It has been shown that in a world of certainty, individuals with rising income streams will choose a graduated payment mortgage over the standard flat payment mortgage. The present paper extends this analysis by introducing uncertainty about future inflation rates. We show that the risk-averse individual, when faced with uncertainty, will choose a less graduated payment path than in the certainty situation. While not conclusive, the analysis may cast some doubt on the suboptimality of the standard flat payment mortgage. |
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