American Economic Review: Insights
ISSN 2640-205X (Print) | ISSN 2640-2068 (Online)
Optimal Mortgage Refinancing with Inattention
American Economic Review: Insights
(pp. 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.Citation
Berger, David, Konstantin Milbradt, Fabrice Tourre, and Joseph Vavra. 2025. "Optimal Mortgage Refinancing with Inattention." American Economic Review: Insights 7 (4): 497–515. DOI: 10.1257/aeri.20240296Additional Materials
JEL Classification
- D91 Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
- G41 Behavioral Finance: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets [Neurofinance]
- G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth