Initially, you find it easy to secure a loan, but gradually you realize that the rate you are paying is more and start looking for the options to curtail the rate if not significantly than minutely. Most of the people having mortgage loan come with a common question, how to lower the current mortgage costs and the answer is blend the rate to improve it.
But is it as easy as it sound, for that first of all you have to understand what is a blended rate, why it is promoted or popular among the masses?
It is a rate of interest that is charged on the loan that represents the combination of a previous and new rate of interest. To get a blended rate you have to refinance the previous loan that charged an interest rate greater than your old loan rate but less than a brand new loan. Blended rates are calculated for accounting purposes to develop an understanding of debt obligation arising from multiple loans having different rates or the revenue flowing from several streams of interests.
Why blended rate is promoted or popular among the masses.
Mortgage lenders promote blended rate to encourage borrowers to refinance their current low-interest loans. Further, these rates are used by the lenders to work out the pooled cost of funds. It represents the weighted average interest rate primarily for corporate debt.
Most of the time it is found that the mortgage penalties that a borrower incurs to break mortgage are greater than three-month interest rate or the value of their interest rate differential. And this is the reason that borrowers are advised to break their mortgage when their rates are not high enough to trigger IRD. This way you are required to pay the three months interest penalty only.
By choosing a blended mortgage, you can avoid the prepayment penalties that are there in case of other refinance options. It is not that with the blended rate you are going to get the best mortgage rate prevailing in the market. Still, it doesn't allow you to pay any upfront penalty.
One can get a blended rate when such borrower wants to access equity, obtain a decreased mortgage rate or both. But it is imperative for the borrower to know that there are two different types of blended mortgage- Blend and extend and blend to term.
Blend and Extend
If you are going for this option, the lender will give you a brand new term at the prevailing rate, but your penalty will be blended in the new rate.
Blend to Term
The idea here is same with what is in the blend to extend; the only thing is that your term will remain unchanged. For example, you would end up with the same term of three years left, but the rate will be lower, and the penalty is blended in the rate.
Before you make any decision, it is advisable to consult the expert; they can provide you with the calculation to let you know how much you are saving by breaking your mortgage rate.