PT  - JOURNAL ARTICLE
AU  - Erwin Charlier
TI  - Quantifying the Refinance Incentive and Losses from Prepayments
AID  - 10.3905/jfi.2001.319290
DP  - 2001 Jun 30
TA  - The Journal of Fixed Income
PG  - 55--64
VI  - 11
IP  - 1
4099  - https://pm-research.com/content/11/1/55.short
4100  - https://pm-research.com/content/11/1/55.full
AB  - A prime factor in prepayment risk is the refinance incentive. It is typically approximated by the ratio of the coupon rate and the prevailing mortgage rate minus one. This article shows that this is a very poor approximation for a wide range of relevant cases. Loan-level data can be used to compute the refinance incentive precisely, without making any approximations. Even in the presence of prepayment penalties, losses from prepayments due to refinancing can be substantial when measured in terms of market value.