Optimal Mortgage Refinancing: A Closed‐Form Solution

B-Tier
Journal: Journal of Money, Credit, and Banking
Year: 2013
Volume: 45
Issue: 4
Pages: 591-622

Authors (3)

SUMIT AGARWAL (not in RePEc) JOHN C. DRISCOLL (not in RePEc) DAVID I. LAIBSON (Harvard University)

Score contribution per author:

0.670 = (α=2.01 / 3 authors) × 1.0x B-tier

α: calibrated so average coauthorship-adjusted count equals average raw count

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 1ψ[φ+W−exp−φ].In this formula W(.) is (the principal branch of) the Lambert W‐function, ψ=2ρ+λσ, φ=1+ψρ+λκ/M(1−τ),where 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.

Technical Details

RePEc Handle
repec:wly:jmoncb:v:45:y:2013:i:4:p:591-622
Journal Field
Macro
Author Count
3
Added to Database
2026-01-25