Optimal Mortgage Reﬁnancing: A Closed Form Solution

 dc.contributor.author Agarwal, Sumit dc.contributor.author Driscoll, John D. dc.contributor.author Laibson, David I. dc.date.accessioned 2012-11-16T16:07:02Z dc.date.issued 2012 dc.identifier.citation Agarwal, Sumit, John D. Driscoll, and David I. Laibson. Forthcoming. Optimal mortgage refinancing: a closed form solution. Journal of Money, Credit, and Banking. en_US dc.identifier.issn 0022-2879 en_US dc.identifier.uri http://nrs.harvard.edu/urn-3:HUL.InstRepos:9918811 dc.description.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))]. en_US 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. dc.description.sponsorship Economics en_US dc.language.iso en_US en_US dc.publisher The Ohio State University en_US dash.license OAP dc.subject mortgage en_US dc.subject refinance en_US dc.subject option value en_US dc.subject normative economics en_US dc.title Optimal Mortgage Reﬁnancing: A Closed Form Solution en_US dc.type Journal Article en_US dc.description.version Accepted Manuscript en_US dc.relation.journal Journal of Money, Credit, and Banking en_US dash.depositing.author Laibson, David I. dc.date.available 2012-11-16T16:07:02Z

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