Blended Mortgage
Definition and meaning of Blended Mortgage in real estate.
A blended mortgage is a home loan refinancing option that combines the interest rate of an existing mortgage with the interest rate of a new loan, resulting in a single interest rate that falls between the two.
In more detail
This option is useful for homeowners who want to borrow additional funds or extend their loan term without giving up a low interest rate on their original mortgage. Lenders calculate the blended rate by taking a weighted average of the original loan balance at the old rate and the new advanced funds at the current market rate.
This allows the borrower to avoid prepayment penalties that would apply if they broke their original mortgage contract early. However, homeowners should compare a blended mortgage with other financing methods, such as a second mortgage or a home equity line of credit, to find the most cost-effective option.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Who pays | Homeowners seeking additional funds or refinancing options |
| Primary benefit | Allows access to new funds at a rate lower than current market rates while avoiding prepayment penalties |
| Watch out for | Blended rates that may be higher than other options if market rates are rising rapidly |
A homeowner with a low-rate mortgage wants to borrow extra funds to remodel, so their lender blends their existing loan rate with the current market rate to create a single blended rate for the entire debt.
Frequently asked questions
How is a blended mortgage rate calculated?
Lenders calculate the rate using a weighted average based on the balance of the original mortgage, the amount of the new funds, and the respective interest rates of both loans.
Why would someone choose a blended mortgage over refinancing?
A blended mortgage is chosen to avoid the penalties associated with breaking an existing low-rate mortgage, while still securing additional funds at a rate lower than a separate second loan.