title: Optimal Mortgage Refinancing: A Closed Form Solution.
abstract: We derive the first closed-form optimal refinancing rule: Refinance when the current mortgage interest rate falls below the original rate by at least [Formula: see text] In this formulaW(.) is the LambertW-function, [Formula: see text]ρis the real discount rate,λis the expected real rate of exogenous mortgage repayment, σ is the standard deviation of the mortgage rate,κ/Mis the ratio of the tax-adjusted refinancing cost and the remaining mortgage value, andτis the marginal tax rate. This expression is derived by solving a tractable class of refinancing problems. Our quantitative results closely match those reported by researchers using numerical methods.
authors.affiliation: Departments of Finance and Real Estate at the National University of Singapore ( ushakri@yahoo.com ).
authors.forename: Sumit
authors.initials: S
authors.lastname: Agarwal
authors.affiliation: Division of Monetary Affairs at the Federal Reserve Board ( John.C.Driscoll@frb.gov ).
authors.forename: John C
authors.initials: JC
authors.lastname: Driscoll
authors.affiliation: Harvard College Professor and Robert I. Goldman Professor of Economics at Harvard University and a Research Associate of the National Bureau of Economic Research.
authors.forename: David I
authors.initials: DI
authors.lastname: Laibson
keywords: Mortgage; option value; refinance