The Demand for Mortgage Debt: Some Basic Results

Abstract This paper presents a formal model of a household′s mortgage-size decision. In the model, the mortgage amount is chosen along with house value and the level of saving. It is shown that the size of the mortgage depends crucially on the relationship between the mortgage interest rate and the rate of return on investment. The analysis considers the case where both rates are nonstochastic, as well as exploring the case where the investment return is risky.