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Do Borrowers Make Rational Choices on Points and Refinancing?

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  • Yan Chang
  • Abdullah Yavas

Abstract

Utilizing individual mortgage data, we find that borrowers with points are less likely to refinance, and when they do, they take longer to refinance. This finding supports the separating equilibrium prediction of earlier studies that borrowers with higher (lower) refinancing costs self‐select into mortgages with higher‐point/lower‐rate (lower‐point/higher‐rate) loans.

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  • Yan Chang & Abdullah Yavas, 2009. "Do Borrowers Make Rational Choices on Points and Refinancing?," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 37(4), pages 635-658, December.
    • Handle: RePEc:bla:reesec:v:37:y:2009:i:4:p:635-658
    DOI: 10.1111/j.1540-6229.2009.00258.x
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    Cited by:

    1. Kristopher Gerardi & Paul S. Willen & David Hao Zhang, 2020. "Mortgage Prepayment, Race, and Monetary Policy," FRB Atlanta Working Paper 2020-22, Federal Reserve Bank of Atlanta.
    2. Keys, Benjamin J. & Pope, Devin G. & Pope, Jaren C., 2016. "Failure to refinance," Journal of Financial Economics, Elsevier, vol. 122(3), pages 482-499.
    3. Weida Kuang & Chunlin Liu & Qun Wu & Hongchao Zeng, 2021. "How do Interest Rate Changes Affect Mortgage Curtailments? Evidence from China," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(S2), pages 395-427, September.
    4. Lu Fang, 2020. "Mortgage Pricing Implications of Prepayment: Separating Pecuniary and Non-pecuniary Prepayment," The Journal of Real Estate Finance and Economics, Springer, vol. 60(3), pages 239-269, April.
    5. Ryan M. Goodstein, 2014. "Refinancing Trends among Lower Income and Minority Homeowners during the Housing Boom and Bust," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 42(3), pages 690-723, September.
    6. Anthony A. Defusco & John Mondragon, 2020. "No Job, No Money, No Refi: Frictions to Refinancing in a Recession," Journal of Finance, American Finance Association, vol. 75(5), pages 2327-2376, October.
    7. Bajo, Emanuele & Barbi, Massimiliano, 2018. "Financial illiteracy and mortgage refinancing decisions," Journal of Banking & Finance, Elsevier, vol. 94(C), pages 279-296.
    8. 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.
    9. 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.
    10. Gerardi, Kristopher & Willen, Paul S. & Zhang, David Hao, 2023. "Mortgage prepayment, race, and monetary policy," Journal of Financial Economics, Elsevier, vol. 147(3), pages 498-524.
    11. Ruben Cox & Dirk Brounen & Peter Neuteboom, 2015. "Financial Literacy, Risk Aversion and Choice of Mortgage Type by Households," The Journal of Real Estate Finance and Economics, Springer, vol. 50(1), pages 74-112, January.
    12. Bálint Dancsik & Nedim Márton El-Meouch, 2019. "Who Can Refinance? The Possibilities and Limitations of Market-based Refinancing in the Case of Mortgages with a Variable Interest Rate," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 18(2), pages 5-30.

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