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Mortgage Refinancing with Asymmetric Information


  • T.L. Tyler Yang
  • Brian A. Maris


Information asymmetry exists between the lender and the borrower regarding the holding period of the mortgaged real estate; the lender does not know how long the borrower plans to own the house. This information asymmetry allows the cost of obtaining a mortgage to deviate from its value to the borrower. As a result, the exercise price of the option to refinance becomes the cost to the borrower of obtaining a new mortgage instead of the outstanding balance of the existing mortgage as used in previous models. The option to refinance is a sequential option; after the borrower refinances, a new option is obtained to refinance again in the future. A mortgage refinancing model is developed taking information asymmetry and sequential refinancing into account. The model is used to solve for (1) the value to the borrower of a callable mortgage and (2) the minimum interest rate differential between the contract rate of the existing mortgage and the market interest rate needed to justify refinancing. Copyright American Real Estate and Urban Economics Association.

Suggested Citation

  • T.L. Tyler Yang & Brian A. Maris, 1993. "Mortgage Refinancing with Asymmetric Information," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 21(4), pages 481-510.
  • Handle: RePEc:bla:reesec:v:21:y:1993:i:4:p:481-510

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    Cited by:

    1. Jill Wetmore & Chiaku Ndu, 2006. "Mortgage Refinancing Activity: An Explanation [1990–2001]," The Journal of Real Estate Finance and Economics, Springer, vol. 33(1), pages 75-86, August.
    2. Sumit Agarwal & Richard J. Rosen & Vincent Yao, 2016. "Why Do Borrowers Make Mortgage Refinancing Mistakes?," Management Science, INFORMS, vol. 62(12), pages 3494-3509, December.
    3. Agarwal, Sumit & Driscoll, John D. & Laibson, David I., 2012. "Optimal Mortgage Reï¬ nancing: A Closed Form Solution," Scholarly Articles 9918811, Harvard University Department of Economics.
    4. 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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