How is the weighted mortgage rate calculated?

The calculation of the weighted mortgage rate is accomplished by using the formula that accounts for both the mortgage amount and the total financing. The correct method is to take the ratio of the mortgage amount to the total financing and then multiply this ratio by the interest rate. This approach provides a weighted average that reflects how much of the total financing is represented by the mortgage, thus giving a more accurate depiction of the effective interest rate.

This method ensures that when lenders look at different loans with varying amounts and interest rates, they can derive a single weighted rate that considers the relative sizes of the loans in relation to their respective financing. It is crucial for assessing the effectiveness and cost of mortgage products, particularly when analyzing portfolios with multiple loans.

Dividing total financing by the mortgage amount does not yield a relevant metric for calculating a weighted rate as it doesn’t incorporate the interest rate directly. Simply multiplying the mortgage amount by the interest rate overlooks the total financing aspect, leading to incomplete information. Adding total financing to the mortgage amount does not provide any insight into the effective interest rate, as it mixes different aspects of financing without establishing the relationship necessary for understanding the weighted rate.