Mortgage Selection Using a Decision-Tree Approach: An Extension

Mortgages are available at various interest rates and vary from traditional fixed-rate contracts to adjustable-rate contracts with a wide range of specific features. A method of comparison using decision-tree analysis recognizes the borrower's concern with both the expected value and the variability of possible outcomes. The expected value and the variance for each of three specific mortgages are calculated using plausible assumptions regarding time preferences. The rational choice among mortgages for the risk-averse borrower depends on the terms or features of the mortgage and the individual's expectations and beliefs.