The Efficient Market Hypothesis in Personal Finance: Choosing an Adjustable or a Fixed Rate Mortgage

Abstract

Homebuyers and commercial real estate investors who obtain funds using mortgages face the choice of a fixed or an adjustable rate mortgage. Fixed rate mortgages have constant payments, but a high initial rate: adjustable rate, interest-only or hybrid mortgages begin with lower rates, but change at fixed intervals over time. Using a straight forward forecasting model, we find that short rates can be forecasted. However, given the limited duration of the cost advantage in the study period, and the transaction and penalty costs of adjusting a borrowing strategy, the decision may not be economically significant.