What is Refinancing Incentive?
Refinancing incentive measures how much a borrower would save by refinancing. If a borrower has a 7.0% mortgage and current market rates are 5.5%, the incentive is 150 basis points. The relationship between refinancing incentive and prepayment speed follows an S-curve: at low incentives (0-75bp), few borrowers refinance; at moderate incentives (75-200bp), prepayment accelerates rapidly; at high incentives (200bp+), the curve flattens as most rate-sensitive borrowers have already refinanced (burnout). The S-curve shape varies by asset class; residential borrowers are most rate-responsive, while commercial borrowers are less so.
How LoanBook Uses Refinancing Incentive
The LoanBook Prepay Model calculates refinancing incentive as the primary input to the S-curve prepayment model for residential and consumer loans; SBA 7(a) loans use their own S-curve. The incentive is recalculated on each Monte Carlo path in the OAS engine as simulated rates change.
Frequently Asked Questions
How much incentive does it take for borrowers to refinance?
Research shows meaningful refinancing activity begins around 50-75bp of incentive and accelerates rapidly through 100-200bp. Above 200bp, the marginal increase in prepayment speed diminishes due to burnout. Transaction costs (origination fees, closing costs) mean borrowers need enough rate savings to justify the expense.
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