Research Details

Abstract

We build a model of optimal fixed-rate mortgage refinancing with fixed costs and inattention and derive a new sufficient statistic that can be used to infer the degree of inattention frictions directly from simple moments of the rate gap distribution. In the model, borrowers pay attention to rates sporadically so they often fail to refinance even when it is profitable. However, when paying attention, borrowers optimally choose to refinance earlier than under a perfect attention benchmark. Our model can rationalize both errors of “omission” (refinancing too slowly) and errors of “commission” (refinancing too quickly) previously documented in the data.

Type

Working Paper

Author(s)

Konstantin Milbradt, David Berger, Fabrice Tourre, Joe Vavra

Date Published

2024

Citations

Milbradt, Konstantin, David Berger, Fabrice Tourre, and Joe Vavra. 2024. Optimal Mortgage Refinancing with Inattention.