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Most people when looking to secure a mortgage, are looking for the lowest interest rate with the best terms. So often in the process, we get confused as to what really makes up and interest rate, and which rate and option is the best for them.

Many customers look to the expertise of their Loan Originator to lock a rate on their loan without knowing why it can and does change. Just so you know, a very small change in rate can mean thousands of dollars to you annually, so it is important to understand the different factors that affect a rate.

Most mortgage products are 30-year terms and are paid off or refinanced within 10 years. With that, the 10-year bond is a useful tool to measure interest rate change.

As you may already know, when the bond rates rise, so do interest rates. Usually when this happens, investors use a spread formula of about 1.70% above the 10-year bond to estimate interest rates. For example, if a bond yield is 3.5%, plus 170 bps, the mortgage rate would be approximately 5.2%.

If you are doing your own homework regarding the rise and fall of interest rates, take the 10-year bond rate and add 1.7% to get a general estimate of the new interest rate. At that time, you might be able to determine if refinancing would be able to save you money over the term of your loan.

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