The role of the initial discount in the pricing of adjustable-rate mortgages

Little attention has been given to the role of the initial discount in the pricing of adjustable-rate mortgages. Only recently has the importance of t he initial discount in the selection of adjustable-rare mortgages been reco gnized. This study finds that the initial discount plays a central role in the pricing process. It is shown that the initial discount is related to th e features of adjustable-rate mortgages, such as the points, the caps, and most importantly the margin, the interest rate environment, and the demand for adjustable-rate mortgages. (C) 2000 Academic Press.