How To Compute Blended Rate: The real cost of all money borrowed

How To Compute Blended Rate: The real cost of all money borrowed

A person called me today concerned that the Fed Discount, Prime Rate, etc will be rising and is considering a refinance. I computed for him the cost of ALL money that he has borrowed and this is the formula to compute blended rates. Note. Interest rates that are averaged will not work because the amount owed is different for every debt.

Loan                                Balance      X      Rate            =         interest cost per year

First Mortgage            327,000               3.75                         12,637
Equity Line                    52,000              4.75                            2,470
Car Loan                         14,548               4.25                              618
Credit Card                    14,000               4.75                              665

Total                             417,548                3.93                          16,390

The 3.93 is the blended cost of money or the real interest rate cost of all money borrowed.
Divide 417,548 into the 16.390 and the answer is 3.93. The conforming loan amount has risen
to 424,100 so this customer could refinance at a similar rate to his blended or effective cost of money.

For this customer it makes sense to refinance cash out for a couple of other reasons: The Fed Rate will
continue to rise and he can fix his interest rate.  Also in his case he can reduce his monthly payments by
$1,081.

Hope this formula helps you and you can compute your own actual interest rate for all money borrowed.

 

 

 

 

 

 

 

Doug Jones

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