Optimal Mortgage Refinancing: A Closed Form Solution
| Title: | Optimal Mortgage Refinancing: A Closed Form Solution |
| Author: |
Agarwal, Sumit; Driscoll, John D.; Laibson, David I.
Note: Order does not necessarily reflect citation order of authors. |
| Citation: | Agarwal, Sumit, John D. Driscoll, and David I. Laibson. Forthcoming. Optimal mortgage refinancing: a closed form solution. Journal of Money, Credit, and Banking. |
| Full Text & Related Files: |
Optimal Mortgage Refinancing 092012.pdf (357.0Kb; PDF) 
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| 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))]. In this formula W(.) is the Lambert W-function, ψ = \(\frac{2 (ρ + λ)}{σ}\), φ = 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. |
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| Citable link to this page: | http://nrs.harvard.edu/urn-3:HUL.InstRepos:9918811 |
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