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Optimal Mortgage Reï¬ nancing: A Closed Form Solution

Author

Listed:
  • Agarwal, Sumit
  • Driscoll, John D.
  • Laibson, David I.

Abstract

We derive the ï¬ rst closed-form optimal reï¬ nancing rule: Reï¬ nance when the current mortgage interest rate falls below the original rate by at least \(\frac{1}{ψ}\)[φ + W (− exp (−φ))]. In this formula W(.) is the Lambert W-function, ψ = \(\frac{2 (Ï + λ)}{σ}\), φ = 1 + ψ (Ï + λ)\(\frac{κ/M}{(1 − Ï„ )}\), Ï is the real discount rate, λ is the expected real rate of exogenous mortgage repayment, σ is the standard deviation of the mortgage rate, κ/M is the ratio of the tax-adjusted reï¬ nancing cost and the remaining mortgage value, and Ï„ is the marginal tax rate. This expression is derived by solving a tractable class of reï¬ nancing problems. Our quantitative results closely match those reported by researchers using numerical methods.

Suggested Citation

  • 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.
  • Handle: RePEc:hrv:faseco:9918811
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Making Finance Work For Households
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2016-01-11 19:57:32

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    Cited by:

    1. Almenberg, Johan & Karapetyan, Artashes, 2009. "Mental Accounting in the Housing Market," SSE/EFI Working Paper Series in Economics and Finance 718, Stockholm School of Economics, revised 28 Aug 2010.

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