Understanding Blended Rate Mortgage: What You Need to Know

When interest rates rise, blended rate mortgages offer a middle-ground solution. Instead of refinancing your entire mortgage at a higher rate, you can blend your existing lower rate with the new rate to create an average interest rate that’s higher than your original but lower than current market rates. This creates a single rate that’s higher than your original but lower than current market rates.

Let’s look at an example:

• Original mortgage: $200,000 at 3.5%
• Additional borrowing: $50,000 at 6%
• Blended rate calculation: ((200,000 × 3.5%) + (50,000 × 6%)) ÷ $250,000 = 4%

It’s important to consider the interest rate differential, which can affect the costs associated with breaking your existing mortgage and opting for a blended rate.

Your new mortgage would have a 4% rate on the total $250,000, rather than two separate loans at different rates.

Blended and Extended

A blended and extended mortgage allows you to combine your existing low interest loans with a new rate while extending your amortization period. This option typically results in lower monthly payments since you’re spreading the cost over a longer term. For instance, if you have 15 years remaining on your current mortgage, you might extend it back to 30 years while blending the rates. This type is particularly useful for homeowners undertaking major renovations or needing significant additional funds while keeping monthly payments manageable.

Blend-to-Term

With a blend-to-term mortgage, you maintain your original fixed-rate mortgage maturity date while blending your existing rate with the new rate for additional funds. This option typically results in higher monthly payments than a blended and extended mortgage since you’re not extending the amortization period. However, you’ll pay less interest over time because you’re keeping your original term length. This option works well for homeowners who want to maintain their original payoff timeline while accessing additional funds.

When considering a blended mortgage, it’s essential to understand the interest rate implications. A blended mortgage combines the interest rate of your existing mortgage with the interest rate of a new mortgage, resulting in a blended interest rate. This rate is typically a weighted average of the two interest rates, taking into account the outstanding balance of each mortgage.

To determine the blended interest rate, mortgage lenders use a formula that considers the interest rates of both mortgages, as well as the outstanding balances. The resulting blended interest rate will be somewhere between the two original interest rates.

For example, if you have an existing mortgage with a 4.5% interest rate and a new mortgage with a 3.5% interest rate, the blended interest rate might be 4.0%. This means that your monthly payments will be based on a 4.0% interest rate, rather than the original 4.5% rate.

It’s crucial to note that the blended interest rate may not always be the best option. In some cases, it may be more beneficial to break your existing mortgage and negotiate a new interest rate, rather than blending the two rates. Using a mortgage affordability calculator can help you understand the true interest rate paid and make an informed decision.

Meet the Johnsons, who purchased their home in 2021 with a $300,000 mortgage at 3.25% with a 30-year term. After making regular payments for three years, their principal balance has decreased to $285,000. In 2024, they want to add a mother-in-law suite, requiring an additional $100,000. Current market rates are 6.5%. Alternatively, the Johnsons could have considered a home equity line of credit (HELOC) to access the equity in their home for the renovation.

Their Options:

1. Full Refinance: Refinancing the entire $400,000 at 6.5% would increase their monthly payments significantly and lose their favorable original rate.
2. Second Mortgage: Taking a separate $100,000 loan at 6.5% would mean managing two payments and potentially higher combined interest rates.
3. Chosen Solution – Blended and Extended: The Johnsons opted for a blended and extended mortgage:

• Original balance: $285,000 at 3.25%
• New funds: $100,000 at 6.5%
• Total new mortgage: $385,000
• Blended rate: 4.1%

This solution provided them:

• One manageable monthly payment
• A rate lower than current market rates
• Extended term to keep payments affordable
• Single loan to manage

The Johnsons saved over $200 monthly compared to taking a separate second mortgage, while maintaining the benefit of their original lower rate on most of their loan balance.

Blended rate mortgages particularly benefit:

• Homeowners needing additional funds
• Those with lower existing rates
• Renovation project planners
• Debt consolidation seekers
• Those looking to optimize their investment income by managing multiple forms of debt

To qualify for a blended mortgage, you’ll typically need to meet the same requirements as for a traditional mortgage. These may include:

• A good credit score
• A stable income
• A sufficient down payment
• A reasonable debt-to-income ratio
• A suitable property value

Additionally, mortgage lenders may require that you have a minimum amount of equity in your home, typically 20% or more. This is to ensure that you have a sufficient stake in the property and are less likely to default on the mortgage.

It’s also important to note that blended mortgages may have specific requirements or restrictions, such as a minimum loan amount or a maximum loan-to-value ratio. Be sure to review the terms and conditions carefully before applying to ensure you meet all the necessary criteria.

Blended mortgages offer several benefits, including:

• Access to a lower interest rate without breaking your existing mortgage
• The ability to tap into home equity without taking out a separate loan
• A single monthly payment that combines both mortgages
• Potential savings on interest payments over the life of the loan

However, there are also some drawbacks to consider:

• The blended interest rate may not always be the best option, and you may end up paying more interest over time
• There may be fees associated with blending the mortgages, such as administrative fees or appraisal fees
• You may be locked into a longer mortgage term, which could limit your flexibility in the future
• The blended mortgage may not be suitable for all types of properties or borrowers

Ultimately, the decision to pursue a blended mortgage should be based on your individual circumstances and financial goals. It’s essential to carefully weigh the pros and cons and consider alternative options before making a decision.

Use this calculator to:

• Compare different scenarios
• Calculate potential savings
• Understand payment changes
• Plan borrowing amounts

Complete Refinance

Consider when:

• Current rates are lower than existing
• Significant cash-out needed
• Term change desired
• Better loan terms available

Home Equity Loans

Good option for:

• Keeping original mortgage intact
• Separate payment tracking
• Shorter-term borrowing
• Tax-deductible interest

HELOC

Beneficial for:

• Flexible borrowing needs: A home equity line of credit (HELOC) is beneficial for flexible borrowing needs, offering a revolving line of credit based on the equity in your home.
• Variable rate acceptance
• Short-term projects
• Ongoing access to equity

We support borrowers by:

• Explaining blended rate options
• Calculating potential savings
• Comparing alternatives
• Structuring optimal solutions

Ready to explore blended rate mortgages? Contact DSLD Mortgage to:

• Review your current rate
• Calculate blended scenarios
• Explore alternatives
• Start your application

Note: Rates and terms vary based on market conditions and individual circumstances. Contact DSLD Mortgage for current offers.

Blended mortgages can be a useful tool for homeowners looking to access a lower interest rate or tap into home equity without breaking their existing mortgage. However, it’s crucial to carefully consider the interest rate implications, qualification requirements, and benefits and drawbacks before making a decision.

By understanding how blended mortgages work and what to expect, you can make an informed decision that aligns with your financial goals and circumstances. Be sure to review the terms and conditions carefully, and don’t hesitate to seek professional advice if needed.