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Thursday, April 8, 2010

What Are Mortgage Rates? Get Your Calculator

Blend of Two Variables

Answering the question, "what are prevailing mortgage rates?" seems simple enough.

After all, the answer should be "5%," "5.25%," or something similar, depending on one's credit scores, and the mortgage product in question (fixed, 5 yr ARM, 10 yr. ARM, etc.).

In practice, it's a little more difficult, because rates are really a function of two variables: the quoted mortgage rate, and the lender's origination fee (also called "points" -- essentially, their commission).

So, whereas a week ago rates may been quoted at 5.25% and .75% points, this week they might be 5.375% and 1% origination.

To make an apples-to-apples comparison, you need to get out a spreadsheet and tweak the mortgage rate by the imputed rate of return on the lender fee (or at least, I think that's what the MBA-types would say).

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