NPV of Refinancing: Rethinking the Borrower's Discount Rate

摘要

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 tow-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.