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Optimal Mortgage Refinancing with Inattention

Author

Listed:
  • David W. Berger
  • Konstantin Milbradt
  • Fabrice Tourre
  • Joseph S. Vavra

Abstract

We build a model of optimal fixed-rate mortgage refinancing with fixed costs and inattention and derive a new sufficient statistic that can be used to measure inattention frictions from simple moments of the rate gap distribution. In the model, borrowers pay attention to rates sporadically so they often fail to refinance even when it is profitable. When paying attention, borrowers optimally choose to refinance earlier than under a perfect attention benchmark. Our model can rationalize almost all errors of “omission” (refinancing too slowly) and a large fraction of the errors of “commission” (refinancing too quickly) previously documented in the data.

Suggested Citation

  • David W. Berger & Konstantin Milbradt & Fabrice Tourre & Joseph S. Vavra, 2024. "Optimal Mortgage Refinancing with Inattention," NBER Working Papers 32447, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32447
    Note: AP CF ME
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    More about this item

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G4 - Financial Economics - - Behavioral Finance
    • G5 - Financial Economics - - Household Finance
    • R2 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis

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