Fixed rate mortgages: The cost of interest rate risk aversion

Kwangwon Ahn, Joetta Forsyth, Hanwool Jang, Dongshin Kim

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)


Mortgages play a significant role in the US economy. Americans predominantly use fixed-rate mortgages (FRMs) to avoid interest rate risk, but the related risk aversion cost has not been analyzed yet. This paper fills the gap by investigating the cost of choosing FRMs over adjustable-rate mortgages (ARMs). We find that ex post, FRM borrowers made 12% – 23% higher payments to avoid 0.66% – 1.62% potential ARM payment shocks. Consequently, we introduce and analyze a payment-saving strategy to absorb ARM payment shocks. Emerging data show that ARM borrowers are less financially constrained and less of a concern to policymakers.

Original languageEnglish
Article number102158
JournalFinance Research Letters
Publication statusPublished - 2022 Jan

Bibliographical note

Funding Information:
Financial support from Yonsei University through the Future-leading Research Initiative (Grant Number: 2020-22-0510 ; Ahn) and from Basic Science Research Program through the National Research Foundation of Korea ( 2020R1A6A3A01100683 ; Jang) are gratefully acknowledged. We thank Peter Chinloy and Stef Schildermans, 2019 AREUEA international conference attendees, and Yunqi Zhang, 2019 AsRES conference attendees, for many helpful suggestions in the early stages of this research.

Publisher Copyright:
© 2021 Elsevier Inc.

All Science Journal Classification (ASJC) codes

  • Finance


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