Mortgage Refinancing Activity: An Explanation [1990–2001]



Mortgage refinancing activity reached unprecedented high levels during 1990–2001. Using GARCH to control for heteroskedasticity and separating the data into regimes to control for potential structural changes over time, we estimate a model explaining changes in mortgage refinancing activity over the period studied. We find changes in refinancing activity to be negatively related to current as well as past changes in the 30-year mortgage rate with a declining significant lag over time. Similarly, there is a significant lagged dependent variable with a declining lag. Moreover, mortgage refinancing activity is a substitute for other investments during certain regimes. These results offer evidence that home owners cash out the mortgage for other investments. The lags suggest that the process is delayed for a variety of reasons. The declining lag signals a faster response by consumers. The reasons for a faster response include a consumer perception that interest rates have “bottomed out,” the presence of an increase in consumer sophistication, and improvements in technology and market coordination that facilitate and reduce the cost of the refinancing process.


Banking Interest rates Mortgages Mortgage prepayment Refinancing 


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© Springer Science + Business Media, LLC 2006

Authors and Affiliations

  1. 1.Saginaw Valley State UniversityUSA
  2. 2.Eastern Connecticut State UniversityWilimanticUSA

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