Woerheide, W., Marquardt, J. & Fortner, R. (1996). A Test of the HUD guideline for borrower selection of a30-year, fixed-rate mortgage. Financial Counseling and Planning, 7, 107-114.
A Test Of The HUD Guideline For Borrower Selection Of A
30-Year, Fixed-Rate Mortgage
Walt Woerheide,(1) Rochester Institute of Technology
John Marquardt,(2) University of Michigan-Flint
Rich Fortner,(3) University of Michigan-Flint
The authors present a relatively simple rule of thumb that can be used for choosing among
alternative 30-year, fixed-rate mortgages, or for estimating the effective cost of such mortgages.
This rule is shown to be substantially more effective as a guide to selection and a significantly better
estimator of effective cost than a rule presented in a HUD booklet given to prospective homebuyers.
Based on an extensive simulation utilizing the most likely parameters, this rule improved the
percentage of correct choices (lower effective cost) of mortgages from HUD’s 71% to 94%.
Eliminating close comparisons of 10 basis points or less and modifying the coefficients further
improved this rule’s correct choices of mortgages to over 99.9%.
KEY WORDS: homebuying, HUD guidelines, mortgage loans, personal finance, rational choices.
1. Walt Woerheide, Professor of Finance, Rochester Institute of Technology, College of Business, Rochester, New York 14623-0887. Phone: (716)
475-5268. Fax: (716) 475-6920. Email: wjwbbu@rit.edu
2. John D. Marquardt, Associate Professor of Accounting, University of Michigan-Flint, School of Management, Flint, Michigan 48502-2186.
Phone: (810) 762-3270. Fax: (810) 762-3282. Email: marquardt_j@crob.flint.umich.edu
3. Richard W. Fortner, Professor of Accounting and Management, University of Michigan-Flint, School of Management, Flint, Michigan 48502-2186. Phone: (810) 762-3160. Fax: (810) 762-3282. E-mail: fortner_r@crob.flint.umich.edu