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Implied Mortgage Refinancing Thresholds

Author

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  • Paul Bennett
  • Richard Peach
  • Stavros Peristiani

Abstract

The optimal prepayment model asserts that rational homeowners will refinance if they can reduce the current value of their liabilities by an amount greater than the refinancing threshold, defined as the cost of carrying the transaction plus the time value of the embedded call option. To compute the notional value of the refinancing threshold, researchers have traditionally relied on discrete- or continuous-time option-pricing models. Using a unique loan level database that links homeowner attributes with property and loan characteristics, this study proposes an alternative approach for estimating the implied value of the refinancing threshold. This empirical method enables us to measure the minimum interest-rate differential needed to justify refinancing conditional on the borrower's creditworthiness, loan-to-value ratio and other observable characteristics. Copyright American Real Estate and Urban Economics Association.

Suggested Citation

  • Paul Bennett & Richard Peach & Stavros Peristiani, 2000. "Implied Mortgage Refinancing Thresholds," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 28(3), pages 405-434.
  • Handle: RePEc:bla:reesec:v:28:y:2000:i:3:p:405-434
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    Cited by:

    1. Xavier Gabaix & Arvind Krishnamurthy & Olivier Vigneron, 2007. "Limits of Arbitrage: Theory and Evidence from the Mortgage-Backed Securities Market," Journal of Finance, American Finance Association, vol. 62(2), pages 557-595, April.
    2. Agarwal, Sumit & Ambrose, Brent W. & Chomsisengphet, Souphala & Liu, Chunlin, 2006. "An empirical analysis of home equity loan and line performance," Journal of Financial Intermediation, Elsevier, vol. 15(4), pages 444-469, October.
    3. Andrew Kalotay & Deane Yang & Frank Fabozzi, 2008. "Optimal mortgage refinancing: application of bond valuation tools to household risk management," Applied Financial Economics Letters, Taylor and Francis Journals, vol. 4(2), pages 141-149.
    4. Anthony Pennington-Cross & Souphala Chomsisengphet, 2007. "Subprime Refinancing: Equity Extraction and Mortgage Termination," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 35(2), pages 233-263, June.
    5. Amy Cutts & Robert Order, 2004. "On the Economics of Subprime Lending," The Journal of Real Estate Finance and Economics, Springer, vol. 30(2), pages 167-196, November.
    6. Lin, Che-Chun & Yang, Tyler T., 2005. "Curtailment as a mortgage performance indicator," Journal of Housing Economics, Elsevier, vol. 14(3), pages 294-314, September.
    7. Sumit Agarwal & John C. Driscoll & David I. Laibson, 2013. "Optimal Mortgage Refinancing: A Closed‐Form Solution," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(4), pages 591-622, June.
    8. Marsha J. Courchane & Judith A. Giles, 2002. "A Comparison of U.S. and Canadian Residential Mortgage Markets," Econometrics Working Papers 0201, Department of Economics, University of Victoria.
    9. Neil Bhutta & Benjamin J. Keys, 2016. "Interest Rates and Equity Extraction during the Housing Boom," American Economic Review, American Economic Association, vol. 106(7), pages 1742-1774, July.
    10. 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.
    11. Daglish, Toby, 2009. "What motivates a subprime borrower to default?," Journal of Banking & Finance, Elsevier, vol. 33(4), pages 681-693, April.
    12. 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.
    13. Agarwal, Sumit & Chomsisengphet, Souphala & Hassler, Olivier, 2005. "The impact of the 2001 financial crisis and the economic policy responses on the Argentine mortgage market," Journal of Housing Economics, Elsevier, vol. 14(3), pages 242-270, September.

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