Mortgages – FPM, VPM

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# Mortgages – FPM, VPM - PowerPoint PPT Presentation

Mortgages – FPM, VPM. Mortgages. Borrow \$ because property owner wants the money NOW. Put the property up as security for the loan.

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### Mortgages – FPM, VPM

Mortgages
• Borrow \$ because property owner wants the money NOW.
• Put the property up as security for the loan.
• Mortgage = A loan to finance the purchase of real estate, usually with specified payment periods and interest rates. The borrower (mortgagor) gives the lender (mortgagee) a lien on the property as collateral for the loan.
Simple Multi-period FP Model

Optimize with respect to h and z.

FP Mortgage Eq’m

In contrast to more flexible analysis, consumer optimizes w.r.t. discounted average price ratio.

Opportunity to save or borrow allows MU of income to converge.

Simple Multi-Period VP Model

Optimize with respect to hi, ciand zi.

Parameters

Moving cost = 1

FP – Mortgage – No Moves

FP – Mortgage – Moves

VP – Mortgage – No Moves

What are the differences?
• Compensating variation (take money) = 2.310
• Equivalent variation (give money) = 2.060
What does it all mean?