TERMS ON CONVENTIONAL MORTGAGE LOANS ON EXISTING HOUSES

Abstract

ECONOMISTS GENERALLY ASSUME at least two things about the structure of interest rates on mortgage loans. The first is that, because of borrower mobility, both stated interest rates and effective interest rates (that is, stated interest rates plus loan costs) tend to be uniform on comparable mortgage loans within a given market area. The second is that interest rates vary as other terms of the mortgage loan contract vary; particularly, it is widely assumed that, since default risk tends to increase as loan to value ratios (LVRs) increase, interest rates also vary directly with LVRs. Both these hypotheses about the mortgage market are, of course, reasonable, but there have been few systematic efforts to substantiate them. Most of the existing data on the relation between interest rates and LVRs are fragmentary, while there are almost no available data at all on the extent of variability of interest rates on comparable loans in a given market area.' The major objective of this paper is to present data that, at least to some extent, test these two hypotheses for a particular market at a particular time. These data show both stated and effective interest