Optimal Mortgage Refinancing with Inattention

David Berger, Konstantin Milbradt, Fabrice Tourre and Joseph Vavra

No 32447, NBER Working Papers from National Bureau of Economic Research, Inc

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 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.

JEL-codes: E4 G21 G4 G5 R2 (search for similar items in EconPapers)
Date: 2024-05
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