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Credit Risk Models: Practical Application to a Mortgage Refinancing Model

A mortgage refinancing model is presented
for cases of default risk on a mortgage where
borrowers have the possibility to minimize risks
by selecting the best refinancing option.
Credit Risk
Mortgage Refinancing

José Rafael Caro-Barrera, “Credit Risk Models: Practical Application to a Mortgage Refinancing Model”, Revista de Métodos Cuantitativos para la Economía y la Empresa. Vol. 28, (Dec 2019): 183–197, doi: https://dialnet.unirioja.es/servlet/articulo?codigo=7182058

Author
Affiliation

José R. Caro-Barrera

University of Córdoba, Spain

Published

December 2019

Preregistered

Abstract

Facing an hypothetical, but increasingly, case of default risk on a mortgage or a fall in interest rates, an important issue raised by the borrower is the possibility of minimizing that risk by selecting the best refinancing option. In this paper, a mortgage refinancing model is presented, developing a purely quantitative programming method with a simulation based on an algorithm created especially for this case and that can be useful for mortgage debtors. Thus, we begin by explaining the theoretical basis on which the research is based, to proceed to develop the problem, continuing with its implementation. Finally, the results are analyzed and the most relevant conclusions are commented.

Important figure

Figure 1: The optimal refinancing policy is expressed as a rule for transforming any possible configuration of the state variable into an action that consists of continuing or refinancing the mortgage. To get a concrete idea of the optimal policy, we plot a sample of the market rate process and indicate the four optimal refinancing times.

Figure 1: Market interest rate trajectory.

Citation

 Add to Zotero 

@article{Caro2019,
    Author = {Caro-Barrera, JR},
    Doi = {https://dialnet.unirioja.es/servlet/articulo?codigo=7182058},
    Journal = {Revista de Métodos Cuantitativos para la Economía y la Empresa},
    Month = {12},
    Number = {28},
    Pages = {183--197},
    Title = {Modelos de Riesgo de Crédito: Aplicación Práctica a un Modelo de Refinanciación de Hipotecas},
    Volume = {2},
    Year = {2019}}