Optimal Mortgage Refinancing: A Closed-Form Solution

Material TypeArticleLanguageEnglish
TitleOptimal Mortgage Refinancing: A Closed-Form Solution Author(S)SUMIT AGARWAL (Author)
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 display math In this formula W(.) is (the principal branch of) the Lambert W-function, display math display math where ? is the real discount rate, ? is the expected real rate of exogenous mortgage repayment, s is the standard deviation of the mortgage rate, inline image is the ratio of the tax-adjusted refinancing cost and the remaining mortgage value, and t 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. ...Paginationp 591-622
SubjectEconomicsDescriptorsEconomics Mortgages
Journal Title Journal of Money, Credit, and Banking  
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