9846

Rational Refinancing of a Residential Mortgage

When interest rates drop, holders of residential mortgages face the decision of whether or not to refinance. Rationally, the decision involves taking the present value of expected mortgage payments under the existing loan and comparing that to the present value of expected payments under the refinanced loan, plus the costs associated with financing. The decision is complicated by the tax treatment of mortgage payments in the United States, which allows the interest portion of payments on a primary mortgage to be deducted from one's income tax, and which allows the cost of buying down the interest rate ("points") to be amortized over the contract life of the new loan, while any unamortized points on an existing loan can be deducted immediately if the loan is refinanced with a new lender.
The model used in this Demonstration is from [1]. A yet more sophisticated model might consider the risk aversion of the refinancer and anticipated variations in that risk aversion over time.

SNAPSHOTS

  • [Snapshot]
  • [Snapshot]
  • [Snapshot]

DETAILS

Reference
[1] G. L. Hoover, "The Mortgage Refinance Decision: An Equation-Based Model," Financial Services Review, 12(4), 2003 pp. 319–337.
    • Share:

Embed Interactive Demonstration New!

Just copy and paste this snippet of JavaScript code into your website or blog to put the live Demonstration on your site. More details »

Files require Wolfram CDF Player or Mathematica.









 
RELATED RESOURCES
Mathematica »
The #1 tool for creating Demonstrations
and anything technical.
Wolfram|Alpha »
Explore anything with the first
computational knowledge engine.
MathWorld »
The web's most extensive
mathematics resource.
Course Assistant Apps »
An app for every course—
right in the palm of your hand.
Wolfram Blog »
Read our views on math,
science, and technology.
Computable Document Format »
The format that makes Demonstrations
(and any information) easy to share and
interact with.
STEM Initiative »
Programs & resources for
educators, schools & students.
Computerbasedmath.org »
Join the initiative for modernizing
math education.
Step-by-step Solutions »
Walk through homework problems one step at a time, with hints to help along the way.
Wolfram Problem Generator »
Unlimited random practice problems and answers with built-in Step-by-step solutions. Practice online or make a printable study sheet.
Wolfram Language »
Knowledge-based programming for everyone.
Powered by Wolfram Mathematica © 2014 Wolfram Demonstrations Project & Contributors  |  Terms of Use  |  Privacy Policy  |  RSS Give us your feedback
Note: To run this Demonstration you need Mathematica 7+ or the free Mathematica Player 7EX
Download or upgrade to Mathematica Player 7EX
I already have Mathematica Player or Mathematica 7+