Homeowners

What Is a Blended Mortgage Rate? How Homeowners Can Borrow More Without Losing Their Low Rate

If you were lucky enough to lock in a 3% mortgage rate a few years ago, you probably don’t want to give it up. And who could blame you?

But what if you need $50,000 for a kitchen renovation, college tuition, or another major expense?

A cash-out refinance could provide the money, but it would also mean replacing that low mortgage rate with a new one.

Another option is to keep your original mortgage and take out a second loan, such as a Home Equity Line of Credit (HELOC). Even if the HELOC carries a higher interest rate, the combination could work out to be less expensive than refinancing your entire mortgage.

The reason comes down to something called a blended mortgage rate.

What is a blended mortgage rate?

A blended mortgage rate is the weighted average interest rate on two or more loans. It’s not a special mortgage product or a rate a lender offers. It’s simply a way to calculate the average interest rate across your mortgage debt.

The calculation takes into account how much you owe on each loan and the interest rate you’re paying.

Kristin Bickenbach, executive vice president of Secondary Marketing at New American Funding, said homeowners shouldn’t automatically assume that taking out a second loan at a higher rate is a bad deal.

“If you can have a 9% on your HELOC, but you still have a 3% on your [mortgage], it [may] still make sense to have those two loans,” said Ankeny.

How does a blended mortgage rate work?

Let’s say you have a $300,000 mortgage with a 3% interest rate. You want to borrow $50,000 to renovate your home.

Here’s what your finances might look like:

• Original mortgage: You still owe $300,000 with a 3% interest rate.
• New HELOC: You borrow $50,000 with a 9% interest rate.
• Total mortgage debt: You now owe $350,000.
• Blended interest rate: Your blended interest rate is now approximately 3.86%.

Even though the HELOC rate is 9%, most of your mortgage debt is still at 3%. The blended rate reflects that difference.

“Even though the HELOC has a higher rate, you’re still benefiting from that low-rate first mortgage,” said Stephen Moye, a sales manager at New American Funding in San Diego. “For many homeowners, that can be more affordable than a cash-out refinance and offer greater flexibility.”

Keep in mind that 3.86% isn’t a new rate you’re paying on a single loan. You still have two separate loans with their own rates, payments, and terms.

Why might a blended rate be better than refinancing?

If you choose to do a cash-out refinance instead, the higher interest rate applies to the entire balance, not just the additional $50,000.

By keeping the original mortgage and adding a HELOC, the homeowner preserves that low rate on most of the debt.

Of course, a lower blended rate doesn’t automatically mean lower monthly payments or lower total borrowing costs. A refinance may offer a different repayment period, and fees and loan terms can affect which option costs less.

What are the downsides of having two mortgages?

A blended rate can look attractive on paper, but homeowners should consider a few things before taking out a second loan.

• Two monthly payments: You’ll be responsible for paying both your original mortgage and your HELOC.
• Variable interest rates: Many HELOCs have rates that can change, which means payments and the blended rate could increase.
• Repayment changes: Some HELOCs allow interest-only payments initially, followed by larger payments when the repayment period begins.
• Additional costs: Depending on the lender, there may be closing costs, annual fees, or other expenses.
• Risk to your home: Both loans are secured by your property, so falling behind on payments could put your home at risk.

When does a blended mortgage rate make sense?

Homeowners with particularly low first mortgage rates may have the most to gain from keeping those loans intact.

A new loan could be worth considering if:

• You have substantial home equity and want to borrow a smaller amount.
• Your existing mortgage rate is significantly lower than the rate you’d qualify for today.
• You can comfortably afford the payments on both loans.
• You want to access your equity without restarting the repayment term on your original mortgage.

On the other hand, homeowners who already have higher mortgage rates or need to borrow a large amount may find that refinancing makes more sense.

Before replacing a low-rate mortgage, homeowners may want to find out what borrowing against their equity would cost. The lowest monthly payment, lowest blended rate, and lowest total borrowing cost aren’t necessarily the same thing.

Stephen Moye NMLS #268619