Optimal Mortgage Refinancing with Inattention

David Berger, Konstantin Milbradt, Fabrice Tourre and Joseph Vavra

American Economic Review: Insights, 2025, vol. 7, issue 4, 497-515

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: D91 G41 G51 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.aeaweb.org/doi/10.1257/aeri.20240296 (application/pdf)
https://doi.org/10.3886/E209306V1 (text/html)
https://www.aeaweb.org/articles/materials/24239 (application/zip)
Access to full text is restricted to AEA members and institutional subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:aea:aerins:v:7:y:2025:i:4:p:497-515

Ordering information: This journal article can be ordered from
https://www.aeaweb.org/journals/subscriptions

DOI: 10.1257/aeri.20240296

Access Statistics for this article

American Economic Review: Insights is currently edited by Amy Finkelstein

More articles in American Economic Review: Insights from American Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Michael P. Albert ().