ARMs make sense in theory, but I've heard that in practice the embedded interest rate option tends to be underpriced because homeowners don't always exercise when it would benefit them.
A good example is students living very frugally and refusing to take out loans even on extremely favorable terms. Or when there are particularly large and predictable future income increases, such as after a residency or analogous period.
Any update?
Interesting idea! Have you looked into this since?
ARMs make sense in theory, but I've heard that in practice the embedded interest rate option tends to be underpriced because homeowners don't always exercise when it would benefit them.
A good example is students living very frugally and refusing to take out loans even on extremely favorable terms. Or when there are particularly large and predictable future income increases, such as after a residency or analogous period.