Optimal Mortgage Refinancing with Inattention

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 measure inattention frictions from simple moments of the rate gap distribution. In the model, borrowers pay attention to rates sporadically so they o...

Full description

Saved in:
Bibliographic Details
Published in:NBER Working Paper Series 2024-05
Main Authors: Berger, David W, Milbradt, Konstantin, Tourre, Fabrice, Vavra, Joseph S
Format: Article
Language:English
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary: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 measure inattention frictions 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. When paying attention, borrowers optimally choose to refinance earlier than under a perfect attention benchmark. Our model can rationalize almost all errors of “omission” (refinancing too slowly) and a large fraction of the errors of “commission” (refinancing too quickly) previously documented in the data.
ISSN:0898-2937
DOI:10.3386/w32447