This paper presents a unified model of the competing risks of mortgage termination by prepayment and default. The model considers these two hazards as dependent competing risks and estimates them jointly. It also accounts for the unobserved heterogeneity among borrowers, and estimates the unobserved heterogeneity simultaneously with the parameters and baseline hazards associated with prepayment and default functions. The results show that the option model, in its most straightforward version, does a good job of explaining default and prepayment; but it is not enough by itself. The simultaneity of the options is very important empirically in explaining behavior. The results also show that there exists significant heterogeneity among mortgage borrowers. Ignoring this heterogeneity results in serious errors in estimating the prepayment behavior of homeowners. The paper also finds that there are significant differences in prepayment and default behavior across regions, arising from variations in institutions or behavioral responses as well as variations in market conditions. Furthermore, the results suggest that those who have chosen high initial LTV loans are more likely to exercise options in the mortgage market — prepayment as well as default. It appears that the initial LTV ratio, known at the time mortgages are issued, may well reflect investor preferences for risk in the market for mortgages on owner-occupied housing. Finally, unemployment and divorce rates have significant effects on default. Taken together, all these results suggest that the simple option model is not enough.This paper presents a unified model of the competing risks of mortgage termination by prepayment and default. The model considers these two hazards as dependent competing risks and estimates them jointly. It also accounts for the unobserved heterogeneity among borrowers, and estimates the unobserved heterogeneity simultaneously with the parameters and baseline hazards associated with prepayment and default functions. The results show that the option model, in its most straightforward version, does a good job of explaining default and prepayment; but it is not enough by itself. The simultaneity of the options is very important empirically in explaining behavior. The results also show that there exists significant heterogeneity among mortgage borrowers. Ignoring this heterogeneity results in serious errors in estimating the prepayment behavior of homeowners. The paper also finds that there are significant differences in prepayment and default behavior across regions, arising from variations in institutions or behavioral responses as well as variations in market conditions. Furthermore, the results suggest that those who have chosen high initial LTV loans are more likely to exercise options in the mortgage market — prepayment as well as default. It appears that the initial LTV ratio, known at the time mortgages are issued, may well reflect investor preferences for risk in the market for mortgages on owner-occupied housing. Finally, unemployment and divorce rates have significant effects on default. Taken together, all these results suggest that the simple option model is not enough.