Implied Mortgage Refinancing Thresholds

29 Pages Posted: 15 Oct 2006

See all articles by Paul G. Bennett

Paul G. Bennett

University of Edinburgh - School of GeoSciences

Richard W. Peach

Federal Reserve Bank of New York

Stavros Peristiani

Federal Reserve Bank of New York--Retired

Date Written: October 1998

Abstract

The optimal prepayment model asserts that rational homeowners would 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, researchs have traditionally relied on a discrete option-pricing model. Using a unique loan level dataset that links homeowner attributes with property and loan characteristics, this study proposes an alternative approach of 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, remaining maturity, and other observable characteristics.

JEL Classification: G13, G21

Suggested Citation

Bennett, Paul G. and Peach, Richard W. and Peristiani, Stavros, Implied Mortgage Refinancing Thresholds (October 1998). FRB of New York Staff Report No. 49, Available at SSRN: https://ssrn.com/abstract=937396 or http://dx.doi.org/10.2139/ssrn.937396

Paul G. Bennett

University of Edinburgh - School of GeoSciences ( email )

Drummond Street
Edinburgh EH8 9XP
Scotland
(0131) 650 2518 (Phone)
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Richard W. Peach (Contact Author)

Federal Reserve Bank of New York ( email )

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New York, NY 10045
United States

Stavros Peristiani

Federal Reserve Bank of New York--Retired ( email )

3001 Henry Hudson Pkwy W
Apartment 1C
Bronx, NY New York 10463
United States
718-796-5190 (Phone)

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