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NPV of Refinancing: Rethinking the Borrower's Discount Rate

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  • Joseph W. Trefzger
  • Roger E. Cannaday

Abstract

The desirability to a borrower of refinancing a loan generally is addressed through net present value, with expected cash flow benefits discounted at the new market interest rate for similar loans. But because the savings from refinancing to a lower interest rate represents an assured advantage to the borrower, his position should be evaluated based on a low-risk discount rate, rather than on the opportunity rate for a lender who faces very different risks in purchasing notes or mortgage-backed securities. This logic supports findings from studies showing that a fairly small decline in interest rates can make refinancing worthwhile.

Suggested Citation

  • Joseph W. Trefzger & Roger E. Cannaday, 2015. "NPV of Refinancing: Rethinking the Borrower's Discount Rate," Journal of Real Estate Practice and Education, Taylor & Francis Journals, vol. 18(1), pages 1-34, January.
    • Handle: RePEc:taf:rjrpxx:v:18:y:2015:i:1:p:1-34
    DOI: 10.1080/10835547.2015.12091740
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