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The Flexible Mortgage: Optimal Financing of a Consumer Durable
Author(s) -
Brueckner Jan K.
Publication year - 1984
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1540-6229.00314
Subject(s) - payment , economics , point (geometry) , value (mathematics) , time value of money , function (biology) , collateralized mortgage obligation , mortgage insurance , finance , microeconomics , actuarial science , computer science , mathematics , geometry , machine learning , evolutionary biology , casualty insurance , biology , insurance policy
Given the recent flood of new mortgage innovations, it is natural to wonder what features a mortgage which is “optimal” from the consumer's point of view might possess. This paper investigates this issue, using optimal control theory to characterize the time profile of mortgage payments (as well as the value of the mortgage) that maximizes an intertemporal utility function. Among other things, the analysis shows that the optimal mortgage payment stream rises over time under reasonable assumptions, highlighting the non‐optimality of the standard flat‐payment mortgage.