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Taxes, Points and Rationality in the Mortgage Market
Author(s) -
Kau James B.,
Keenan Donald
Publication year - 1987
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 - 10.1111/1540-6229.00426
Subject(s) - economics , rationality , loan , secondary mortgage market , rate of return , shared appreciation mortgage , interest rate , mortgage underwriting , financial economics , microeconomics , mortgage insurance , monetary economics , actuarial science , finance , casualty insurance , political science , law , insurance policy
This paper addresses the issue of why discount points exist in the mortgage market. In the process of resolving these questions, a number of insights into the mortgage market are achieved. An important principle is that changes in loan structure due to points, prepayments or other deviations in the typical mortgage have no impact on the competitive rate of return. Thus, the essential role of points is not to raise the effective rate of return nor are they the purchase price a risk‐averter desires for an option to prepay. Instead it is taxes that play the critical role.