Research On Fixed-Rate Mortgage Pricing

Since the housing reformation took place in 1998,the scale of estate mortgage become bigger and bigger. At the same time, securitized mortgage instruments will enter finance markets. With the implementation of market-oriented interest rate, loan price does not stipulate by Central Bank, the independent pricing ability of the loan becomes the focal point that the commercial bank study at the present stage, scientific loan pricing has reflected the competitiveness of the bank. Fixed-Rate Mortgage (FRM)seem complicated than floating interest rate even more, because once interest rate is fixed by contract, the interest rate can hardly change, the longer the time limit the loan is, the greater risk is: rising of interest rate cause bank loss of interests, interest rate reduce might initiate prepay, pledge risk price of assets fluctuate might initiate default etc.The text is on the basis of comparative analysis about domestic and international various loan pricing method, has analysis the risk of FRM. With the PSA model to depicts cash flow and the resulting average duration of loans, the term structure of deposit rates, using the Newton interpolation method to derive the discount rate. Then, focusing on the borrower's default behavior analysis, using the principle of option pricing to build a single-factor fixed-rate mortgage pricing model.This paper uses the binomial tree method in operating the pricing model. In the example, this paper describes the process how to confirm the model parameters. From the example analysis,it can be conclude that mortgage price has distinct option characteristics, and the movement of house price will sway the mortgage price. Therefore, the macro-control of the real estate market is one measure to avoid the economy big ups and down, can control the mortgage.