During the past decade’s housing boom, borrowers with lower credit ratings were more likely than higher-rated borrowers to choose adjustable-rate mortgages. This raises the question of whether, amid rapidly rising house prices, lower-rated borrowers paid less attention to loan pricing and interest-rate-related factors. However, even accounting for house price appreciation, research shows these borrowers were as, if not more, responsive as higher-rated borrowers to changes in interest-rate-related fundamentals. Their tendency to choose adjustable-rate mortgages is consistent with mortgage decisions based on economic considerations, rather than just lack of financial sophistication.
Drivers of Mortgage Choices by Risky Borrowers
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