Extending the Benefits of Mortgage Refinancing: the Case for the Auto-Refi Mortgage

Abstract

Mortgage refinancing typically reduces the homeowner’s monthly payment, which leads to an increase in consumption and a decrease in mortgage defaults. However, refinancing the traditional fixed-rate mortgage is burdensome and many borrowers fail to refinance despite having a considerable financial incentive. In this paper, I propose a new mortgage contract that automatically refinances when a 0.50% interest rate differential and 7.5% payment reduction minimum can be met, unless the borrower opts out. When triggered, the “auto-refi” mortgage automatically refinances and reduces the borrower’s monthly payment, extending the consumption and default-related benefits of refinancing to more borrowers without the burdens associated with refinancing a traditional fixed-rate mortgage. Once introduced, the auto-refi mortgage would reduce or remove the income and race-based inequity that plagues the traditional fixed-rate mortgage refinancing process and embed an automatic counter-cyclical stimulus into every mortgage that would even-out some of the uneven distributional effects of monetary policy.

Keywords: mortgage, mortgage refinancing, monetary policy

JEL Classification: G51, G21