Transaction costs, mortgage rate heterogeneity, and the failure to refinance

Leonard Kiefer, Hua Kiefer and Tom Mayock

Real Estate Economics, 2025, vol. 53, issue 4, 701-735

Abstract: Previous work has argued that many U.S. households fail to refinance their mortgages when it is financially advantageous to do. These analyses typically maintain the simplifying assumptions that there is no heterogeneity in loan closing costs and mortgage rates. In the first part of this study, we use unique loan‐level data on loan originations and closing costs to demonstrate that neither of these assumptions holds empirically: the cost of refinancing a mortgage varies enormously between states, and there is a significant amount of heterogeneity across borrowers in the rates charged for mortgages. In the second part of our article, we alter the traditional fail‐to‐refinance (FTR) framework to account for this variation in transaction costs and mortgage rates. We find that once we allow for closing cost and mortgage rate heterogeneity, suboptimal refinancing behavior is less prevalent than what has been reported previously. Importantly, we also find that accounting for borrower‐level mortgage rate heterogeneity significantly reduces the FTR rate among borrowers with low credit scores and high loan‐to‐value ratios. When we study refinancing behavior on a state‐by‐state basis, we find that accounting for variation in closing costs significantly lowers the FTR rate in states with high closing costs.

Date: 2025
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