Please use this identifier to cite or link to this item: https://doi.org/10.1111/jmcb.12017
Title: Optimal Mortgage Refinancing: A Closed-Form Solution
Authors: Agarwal, S. 
Driscoll, J.C.
Laibson, D.I.
Keywords: Mortgage
Option value
Refinance
Issue Date: Jun-2013
Citation: Agarwal, S., Driscoll, J.C., Laibson, D.I. (2013-06). Optimal Mortgage Refinancing: A Closed-Form Solution. Journal of Money, Credit and Banking 45 (4) : 591-622. ScholarBank@NUS Repository. https://doi.org/10.1111/jmcb.12017
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. © 2013 The Ohio State University.
Source Title: Journal of Money, Credit and Banking
URI: http://scholarbank.nus.edu.sg/handle/10635/123847
ISSN: 00222879
DOI: 10.1111/jmcb.12017
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