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Explaining Refinancing Decisions Using Microdata

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  • Amy Dickinson
  • Andrea J. Heuson

Abstract

This paper develops a model which explains how mortgage‐rate movements, transactions costs, changes in borrower income and house value, personal financial opportunities and the prepayment option embedded in fixed‐rate mortgages affect a financially flexible borrower's decision to refinance an existing loan while retaining the underlying home. Broadening the focus of previous analytical work, the model explains why households with similar mortgage loans may react differently as financial market conditions change. It contains definitive empirical predictions that are supported by an analysis of a choice‐based sample of individual loan transactions. Results suggest that refinancings are motivated both by movements in the level of interest rates and by borrowers' desires to alter their capital structures in the face of changing income and housing wealth.

Suggested Citation

  • Amy Dickinson & Andrea J. Heuson, 1993. "Explaining Refinancing Decisions Using Microdata," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 21(3), pages 293-311, September.
    • Handle: RePEc:bla:reesec:v:21:y:1993:i:3:p:293-311
    DOI: 10.1111/1540-6229.00612
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    Cited by:

    1. Archer, Wayne R. & Ling, David C. & McGill, Gary A., 1996. "The effect of income and collateral constraints on residential mortgage terminations," Regional Science and Urban Economics, Elsevier, vol. 26(3-4), pages 235-261, June.
    2. Archer, Wayne R. & Ling, David C. & McGill, Gary A., 1997. "Demographic versus Option-Driven Mortgage Terminations," Journal of Housing Economics, Elsevier, vol. 6(2), pages 137-163, June.
    3. Hyeongjun Kim & Hoon Cho & Doojin Ryu, 2018. "Characteristics of Mortgage Terminations: an Analysis of a Loan-Level Dataset," The Journal of Real Estate Finance and Economics, Springer, vol. 57(4), pages 647-676, November.
    4. Lee, Pei-Ting & Rosenfield, Donald B., 2005. "When to refinance a mortgage: A dynamic programming approach," European Journal of Operational Research, Elsevier, vol. 166(1), pages 266-277, October.
    5. Lee, Jinkook & Hogarth, Jeanne M., 2000. "Consumer information search for home mortgages: who, what, how much, and what else?," Financial Services Review, Elsevier, vol. 9(3), pages 277-293, 00.

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