Year: 2007
Type: report
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 \\(\\frac{1}{ψ}\\)[φ + W (− exp (−φ))]. \nIn this formula W(.) is the Lambert W-function, \nψ = \\(\\frac{2 (ρ + λ)}{σ}\\), \nφ = 1 + ψ (ρ + λ)\\(\\frac{κ/M}{(1 − τ )}\\), 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, κ/M 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.
DOI: 10.3386/w13487
Authors: Sumit Agarwal, John Driscoll, David Laibson
Language: English
Topic: Housing Market and Economics
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W3125661422