Optimal Mortgage Refinancing with Stochastic Interest Rates

Andrew H. Chen · David Curtis Ling

60 citations0/0 files storedReal Estate Economics

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Housing Market and Economics Stochastic processes and financial applications Capital Investment and Risk Analysis

Abstract

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.

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References

1985A Theory of the Term Structure of Interest Rates 1979Option pricing: A simplified approach 1986Term Structure Movements and Pricing Interest Rate Contingent Claims 1981A Re-Examination of Traditional Hypotheses about the Term Structure of Interest Rates 1981Valuation of GNMA Mortgage-Backed Securities 1977Savings bonds, retractable bonds and callable bonds 1985Valuation by Approximation: A Comparison of Alternative Option Valuation Techniques 1980The Pricing of Options on Debt Securities

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