Beyond Affordability: An Analysis of Borrower Age and ARM Selection from HDMA Data
Year: 2026
Type: preprint
Study design: Observational Study
Abstract: This paper tests whether borrower age predicts selection into payment-minimizing mortgage features controlling for the mobility and income-growth channels that the standard life-cycle model (Campbell & Cocco, 2003) says should explain the selection instead. Using 2021, 2023, and 2024 HMDA data on home-purchase loans nationwide, I model four such features (adjustable-rate, interest-only, extended-term, and balloon) and find that a single federal rule (the Dodd-Frank Qualified Mortgage rule) has made all but adjustable-rate(ARM) loans rare nearly everywhere. In the high-rate years (2023-2024), ARM is the dominant feature in all 51 states/DC; in the low-rate year 2021, ARM dominates in only 43, with interest-only dominant in the other 8-showing that uniform ARM dominance is a feature of the rate environment. Controlling for mobility, income growth, loan size, loan program, lender identity, and state fixed effects, a residual age effect survives, but runs opposite to the hypothesis. Instead of younger buyers with limited credit choosing lower payments, the effect is strongest among older borrowers who have more financial flexibility, especially those with balloon payments. This finding consistently appears in all three years and under both interest rate conditions. In contrast, the pattern among borrowers under 35 varies depending on interest rate conditions and is not consistent across the years. These results suggest that affordability is not the main reason borrowers choose these loans. Instead, there are possible explanations that remain: older borrowers may have reasons for wanting shorter loan terms, there may be an unobserved short-tenure motive among older borrowers, or older borrowers may be less concerned about payment risks because they have more financial resources to fall back on.
Source: SSRN Electronic Journal
DOI: 10.2139/ssrn.7663458
Author: Harman Bedi
Language: English
Topic: Housing Market and Economics
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W7223564589