Choosing a discount point/contract rate combination

Confronted with an array of contract rate/discount point combinations from which to choose, a mortgagor must evaluate his/her wealth with respect to each choice. The future path of the cost of mortgage capital will affect the wealth of the mortgagor to a different degree depending on which contract rate/discount point combination he/she chooses. Using the Expected Monetary Value algorithm, we show that variation of marginal income tax rates and expectations about the future path of the cost of mortgage capital across mortgagors can explain the demand for different contract rate/discount point combinations. Our results provide a rationale for a mortgagor choosing an intermediate point/contract rate combination.Paper presented at the annual meeting of the A.R.E.U.E.A., 1989, Atlanta.