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A Study on Comparison in Money's Worth between Fixed Rate and Adjustable Rate Mortgage Loans in Korea
Korea Real Estate Review
2010,
20(1), pp.181-204
Publisher : korea real estate research institute
Research Area : Law of Real Estate
Publisher : korea real estate research institute
Research Area : Law of Real Estate
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This paper is the first trial in evaluating money's worths of fixed rate and adjustable rate mortgages in Korea. To calculate the values, flows of monthly repayment contingent on a stochastic interest rate path model were generated. After setting a discount-rate term structure for computing present values, simulations were implemented. The result suggests that the money's worth of fixed rate mortgage is higher than that of adjustable rate mortgage when the current level of the two mortgages' interest rate were applied. Although borrowers might be sensitive to initial repayment, they would prefer the one with higher money's worth when they can calculate and compare the present values of the total monthly repayment(to maturity) among the options they have. Therefore, to expand the portion of fixed rate mortgage and alleviate instability and borrowers' bias toward adjustable rate mortgage in the Korean market, Korea Housing Finance Corporation needs to pour its efforts to promote the superiority of its commodity in terms of money's worth on the borrowers' side.
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