Modeling conventional residential mortgage refinancings

✍ Scribed by S. Michael Giliberto; Thomas G. Thibodeau

• Book ID: 104652505
• Publisher: Springer US
• Year: 1989
• Tongue: English
• Weight: 908 KB
• Volume: 2
• Category: Article
• ISSN: 0895-5638
• DOI: 10.1007/bf00177949

✦ Synopsis

This article models fixed-rate mortgage refinancings and offers an empirical test of the model. The model relates the probability that a household prepays its residential mortgage to both financial and economic variables. The financial variables included in the model measure the value of the embedded call option present in conventional fixed-rate mortgage loans. The economic variables measure the household's propensity to prepay for housing consumption adjustment reasons. Our main empirical finding is that increased interst-rate volatility significantly decreases prepayment probability. In addition, we find some statistical evidence to support the hypothesis that prepayment rates increase with increases in household income, increases in household size, and vary by age of household head and regionally.