Optimal Mortgage Reﬁnancing: A Closed Form Solution

Optimal Mortgage Reﬁnancing: A Closed Form Solution

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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))]. 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.	en_US
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