—Assuming that the market interest rate follows the
Vasicek model, this paper focuses on finding an optimal
refinancing interest rate boundary where a proportional
transaction fee is charged when the mortgage borrower decides
to leverage on the refinancing strategy to lower his financial
cost. An optimal refinancing premium is introduced by
risk-neutral analysis, then is used to recursively determine the
minimization of discounted payment streams of the mortgage
contract. Intriguing properties of the optimal refinancing
boundary are discovered with numerical simulations.
—Mortgage refinancing, refinancing value,
transaction fee, risk-neutral pricing.
Jin Di is with the Department of Mathematics, Xi‟an Jiaotong University,
China (email: firstname.lastname@example.org).
Jin Zheng is with the Department of Mathematical Sciences, University
of Liverpool, U.K (email: email@example.com)
Nan Zhang is with the Department of Computer Science and Software
Engineering, Xi‟an Jiaotong Liverpool University, China (email:
Siwei Gan is with the Department of Mathematical Sciences, Xi‟an
Jiaotong Liverpool University, China (email: firstname.lastname@example.org).
Cite:Di Jin, Jin Zheng, Nan Zhang, and Siwei Gan, "An Analysis of the Impact of Transaction Cost on the
Borrower‟s Refinancing Decisions," Journal of Economics, Business and Management vol. 2, no. 3, pp. 224-228, 2014.