A Note on the Valuation of Mortgage Loan Commitments: Incorporating the Commitment Cost in the Mortgage Rate

Abstract

Kutner and Seifert recently found that mortgage loan commitments have significant financial value. This note presents a procedure that may be used to incorporate this value in the nominal lending rate. The findings indicate that typical lending rates should be augmented by approximately 8 to 44 basis points in order to adequately capture this additional cost.