Premium
Optimal Mortgage Refinancing with Stochastic Interest Rates
Author(s) -
Chen Andrew H.,
Ling David C.
Publication year - 1989
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1540-6229.00492
Subject(s) - interest rate , economics , prepayment of loan , value (mathematics) , mortgage underwriting , fixed interest rate loan , shared appreciation mortgage , liability , monetary economics , floating interest rate , mortgage insurance , actuarial science , finance , computer science , insurance policy , casualty insurance , machine learning
The purpose of this paper is to develop a dynamic model of mortgage refinancing in a contingent claim framework that simultaneously solves for the borrower's optimal mortgage refinancing strategy, the value of the refinancing call option, the value of the mortgage liability to the borrower, and the market (lender) value of the fixed‐rate contract. We also calculate the minimum differential between the contract rate on the existing mortgage and the current interest rate that is required to trigger an optimal mortgage refinancing.