Present Bias and Mortgage Refinancing Decisions

This paper studies the optimal mortgage refinancing problem of a behavioral household who is present-biased and inattentive to mortgage rates. In solving the problem, I derive the first closed-form optimal refinancing rule of a behavioral household, enabling the estimation of the model. I estimate the model based on Danish administrative data, showing that it can endogenously explain delays in mortgage refinancing. I find substantial evidence of present bias among households, with the average household having a short-run discount factor of beta=0.39. Older, less-educated, financially wealthier, and higher-income households exhibit stronger present bias, whereas higher housing wealth and financial literacy reduce this behavioral bias. Implications for the refinancing channel of monetary policy transmission are discussed