NPV of Refinancing: Rethinking the Borrower's Discount Rate

Joseph W. Trefzger and Roger E. Cannaday

Journal of Real Estate Practice and Education, 2015, vol. 18, issue 1, 1-34

Abstract: The desirability to a borrower of refinancing a loan generally is addressed through net present value, with expected cash flow benefits discounted at the new market interest rate for similar loans. But because the savings from refinancing to a lower interest rate represents an assured advantage to the borrower, his position should be evaluated based on a low-risk discount rate, rather than on the opportunity rate for a lender who faces very different risks in purchasing notes or mortgage-backed securities. This logic supports findings from studies showing that a fairly small decline in interest rates can make refinancing worthwhile.

Date: 2015
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DOI: 10.1080/10835547.2015.12091740

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