What Is a Blended Rate Mortgage?
When it comes to buying a home, you actually have a variety of choices in your mortgage – it’s not one-size-fits-all. We recently talked about a cash back mortgage, and today we’d like to take a look at a blended rate mortgage.
When you purchase your home, signing up for that five-year fixed-rate mortgage may seem like the right decision, especially if the interest rate is low. However, you may encounter opportunities to take advantage of even lower rates or wish to access your home equity during the term of your current mortgage.
This is what blended rate mortgages are for.
A blended rate mortgage is a way to take advantage of lower rates or access your equity without paying expensive penalties to break your current mortgage term. Your lender combines your existing interest rate with an available lower rate, and they may or may not require a term extension.
For example, if your current mortgage interest rate is 3.95% and the current available rate is 2.19%, your lender will convert your mortgage to an interest rate somewhere in between. There are two types of blended rate mortgages: Blend and Extend, and Blend to Term.
A blend-and-extend mortgage is exactly what it sounds like – taking your current mortgage, mixing it with a new one, and extending the term. In this case, your lender will blend the interest rates on your current mortgage and that of the new, lower interest rate mortgage. With this option, the clock will reset on your term. For example, if you have two years left on your five-year fixed mortgage at a 4.95% interest rate, and you’re looking to take advantage of a new interest rate of 2.95%, you’ll get a new five-year fixed mortgage at a rate somewhere between those two rates.
Typically, you’d break your current mortgage early and be subject to expensive prepayment penalties, but with this type of blended rate mortgage, you’ll avoid these penalties and renew your mortgage at a lower rate.
A blend-to-term mortgage is similar to blend-and-extend, but you don’t extend the remaining term of your existing mortgage. Since your lender will be losing out on the interest you would have paid at your current higher rate, this type of mortgage comes with conditions.
As an example, it is usually only offered if you’re also accessing your home equity which increases the principal mortgage amount. If you’re not accessing equity but wish to take advantage of this option, your lender may require you to pay a portion of your prepayment penalties.
Is a Blended Rate Mortgage the Best Option?
Several factors need to be considered to determine if choosing a blended rate mortgage is the right solution to your needs.
- Avoid expensive prepayment penalties. Depending on how many years left you have in your current term, choosing a blended mortgage may save you thousands of dollars in interest.
- Take advantage of dropping interest rates. Although mortgage interest rates have been at record lows for quite some time, you may find the currently available rates are lower than that of your current mortgage. In that case, it’s worth looking into a blended mortgage rather than waiting out your current term.
- Access your home equity. If you have a healthy amount of equity in your home, you may choose to use it to pay down other debt, perform home repairs, or other expenses. A blended rate mortgage will help you take advantage of these available funds.
- Prepayment penalties may be less than your blended interest over the new term. Be sure to calculate the actual dollar amount of penalties you’d pay to break your mortgage and compare it to the interest you’ll accumulate during the term of your blended rate mortgage.
- Blended mortgages come with restrictions. This type of mortgage cannot be transferred to a new property if you move.
- There may be fees attached to changing your mortgage. Even though you’re avoiding prepayment penalties, there may be other fees attached to the processing of this change.
Deciding what type of mortgage is best for your unique needs means doing your due diligence in weighing your financial options. Speak to your lender to discuss refinancing options, and whether the interest saved or equity accessed by moving to a blended rate mortgage is beneficial to you.
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About the Author:
At Sterling Homes, our mission is to provide the opportunity for affordable homeownership without compromise. Over the last 70 years, Sterling Edmonton has quickly become one of Edmonton’s most popular builders. We bring more than seven decades worth of exceptional customer service, superior design and unparalleled craftsmanship to the greater Edmonton area. As a member of the Qualico Group, Sterling Homes focuses on greater Edmonton’s finest family communities, while being able to offer some of the region’s most family friendly prices thanks to volume purchasing power for materials, trades and land. This has not only made Sterling one of Edmonton’s bestselling, move-up builders, but also one of the industry’s most respected home providers.
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