Work

Optimal Mortgage Refinancing: A Closed‐Form Solution

Year: 2013

Type: article

Abstract: We derive the first closed‐form optimal refinancing rule: refinance when the current mortgage interest rate falls below the original rate by at least urn:x-wiley:00222879:jmcb12017:equation:jmcb12017-math-0001 In this formula W (.) is (the principal branch of) the Lambert W ‐function, urn:x-wiley:00222879:jmcb12017:equation:jmcb12017-math-0002 urn:x-wiley:00222879:jmcb12017:equation:jmcb12017-math-0003 where ρ is the real discount rate, λ is the expected real rate of exogenous mortgage repayment, σ is the standard deviation of the mortgage rate, is the ratio of the tax‐adjusted refinancing cost and the remaining mortgage value, and τ is the marginal tax rate. This expression is derived by solving a tractable class of refinancing problems. Our quantitative results closely match those reported by researchers using numerical methods.

Source: Journal of money credit and banking

DOI: 10.1111/jmcb.12017

Authors: SUMIT AGARWAL, JOHN C. DRISCOLL, DAVID I. LAIBSON

Institutions: National University of Singapore, Federal Reserve Board of Governors, National Bureau of Economic Research, Harvard University

Language: English

Topic: Housing Market and Economics

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: bronze

Funders: National Science Foundation, National Institute on Aging

Awards: DRU -- Collaborative Research: An Econophysics and Behavioral Approach to Financial Fluctuations, G8137569311, Understanding and Improving Healthcare Decision-Making and Outcomes for People Living with Alzheimer's Disease and Related Dementias, NBER Roybal Center for Behavior Change in Health