As indicated last week, the annual percentage rate (APR) that the law requires mortgage lenders to disclose alongside the interest rate is not a useful measure of cost to the borrower. Expressed as a percent, it makes no intuitive sense to most borrowers, does not yet cover all costs, and does not take account of differences in borrower time horizons, tax rates and opportunity costs. A much more useful measure is the "time horizon cost" (THC) that is described below. The THC is the total cost of the mortgage in dollars over the period the borrower expects to be in the house. I will illustrate it with the example I used last week of a borrower choosing between a fixed-rate mortgage (FRM) at 5.125 percent and zero points, and another at 4.25 percent and 4.4 points. The loan amount is $100,000 and settlement costs other than points are $1,000 in both cases. I am going to assume initially that the borrower expects to be in the house four years, is in the 15 percent t...
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