Borrower Age and ARM Selection: 2023 HMDA Evidence

This paper examines whether a borrower’s age affects their choice of mortgage, even after accounting for factors such as expected income growth and how often they may move. Using nationwide mortgage data from 2021, 2023, and 2024, I study four types of mortgage features that can offer lower monthly payments: adjustable-rate mortgages (ARMs), interest-only loans, extended-amortization loans, and balloon-payment loans. Following the Dodd-Frank mortgage reforms, all but ARMs have become relatively uncommon. In 2023 and 2024, when interest rates were high, ARMs were the most common of these four features in all 50 states and Washington, D.C. However, in 2021, when interest rates were low, ARMs were the most common in only 43 states, while interest-only loans were more common in the remaining eight. After accounting for factors such as income, loan size, loan program, expected mobility, and differences between states and lenders, I find that age still plays a role in mortgage selection. However, the results are different from my original hypothesis. I expected younger borrowers with greater financial constraints to be more likely to choose mortgages with lower monthly payments. Instead, the strongest relationships appear among older borrowers who seem to have greater financial flexibility, especially for balloon-payment loans. The relationship between older age and ARM selection appears in all three years, regardless of whether interest rates were high or low. In contrast, the results for borrowers under 35 are less consistent across the years. These findings suggest that financial difficulties among younger borrowers do not fully explain why people choose these mortgage features. One possible explanation is that older borrowers expect to move or pay off their loans sooner. Another is that they prefer lower monthly payments even when they can afford higher ones. Differences in financial knowledge and experience may also influence mortgage choices. However, more research is needed to determine why these patterns occur.