Optimal Mortgage Refinancing: A Closed‐Form Solution
Open accessAbstract
We derive the first closed‐form optimal refinancing rule: refinance when the current mortgage interest rate falls below the original rate by at least urn:x-wiley:00222879:jmcb12017:equation:jmcb12017-math-0001 In this formula W (.) is (the principal branch of) the Lambert W ‐function, urn:x-wiley:00222879:jmcb12017:equation:jmcb12017-math-0002 urn:x-wiley:00222879:jmcb12017:equation:jmcb12017-math-0003 where ρ is the real discount rate, λ is the expected real rate of exogenous mortgage repayment, σ is the standard deviation of the mortgage rate, is the ratio of the tax‐adjusted refinancing cost and the remaining mortgage value, and τ is 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.
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- Authors
- AGARWAL, S., DRISCOLL, J. C., & LAIBSON, D. I.
- Affiliations
- National University of Singapore (SG)
- Federal Reserve Board of Governors (US)
- National Bureau of Economic Research (US)
- Corresponding author
- LAIBSON, DAVID I.
- Venue
- Journal of Money, Credit and Banking
- Publisher
- Wiley
- Published
- 2013-05-17
- Volume
- 45
- Issue
- 4
- Pages
- 591-622
- ISSN
- 0022-2879 (ISSN-L)
- 1538-4616
- PMC
- PMC4381666
- OpenAlex
- W3124856600
- Cited by
- 185
- References
- 0
- Citations by year
- 2026: 12 · 2025: 11 · 2024: 15 · 2023: 13 · 2022: 10 · 2021: 18 · 2020: 17 · 2019: 11 · 2018: 16 · 2017: 13 · 2016: 15 · 2015: 8 · 2014: 10 · 2013: 8 · 2012: 2
- FWCI
- 32.08
- Type
- journal article
- Language
- en
- Open access
- bronze
- doi.org
- Locations
- Journal of money credit and banking (publishedVersion)
- PubMed (publishedVersion)
- Europe PMC (PubMed Central) (acceptedVersion)
- PubMed Central (acceptedVersion)
- National University of Singapore (submittedVersion)
- Funders
- National Science Foundation (0527516)
- National Institute on Aging (AG005842, P01AG005842, P30AG034532)
- Topics
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Housing Market and Economics
- Social Sciences › Economics, Econometrics and Finance › Finance › Stochastic processes and financial applications
- Social Sciences › Economics, Econometrics and Finance › Economics and Econometrics › Economic theories and models
- Keywords
- mortgage refinancing, analytical solution, Lambert W function, mortgage interest rates, refinancing costs, marginal tax rates, housing finance
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