Refinancing Incentive
From Open Risk Manual
Definition
Refinancing Incentive is the economic incentive of a Borrower to Refinance an existing borrowing with a new contract. The refinancing incentive is a key driver of Prepayment Risk.
Measurement
The measurement of the refinancing incentive invariably focuses on the net present value savings obtained when refinancing a loan with an existing applicable interest rate 
to a new loan at the current rate 
. This difference measures whether the expected value of prepaying the loan/mortgage exceeds the value of not prepaying.
Issues and Challenges
- A strong refinancing incentive does not necessarily translate into actual Prepayment.
- A refinancing incentive as defined above does indicate whether prepayment is optimal
