Blended interest rates are important for homeowners with multiple loans, such as a primary mortgage and a second lien or home equity loan. Knowing your blended rate allows you to compare the total interest you’re paying across all loans, helping you decide whether refinancing into a single loan might save you money in the long run.
What is a Blended Interest Rate? (Definition & Explanation)
A blended interest rate, also called a weighted average, is a calculation that combines the interest rates from two or more loans into a single, average rate. This is helpful when you have multiple loans with different interest rates, such as a mortgage at one rate and a second loan at a higher rate.
Why it’s important:
- Helps you understand your overall cost of borrowing.
- Provides a clear picture of whether it makes sense to refinance or consolidate loans.
How Does a Blended Interest Rate Work? (How It’s Calculated)
A blended interest rate works by taking into account both the size of your loans and their individual interest rates. It calculates the effective interest rate you’re paying across both loans combined.
Steps to Calculate a Blended Interest Rate:
- Calculate the proportion of each loan relative to the total loan balance.
- Multiply each proportion by the corresponding loan’s interest rate.
- Add the results together to get the blended interest rate.
Example of Blended Interest Rate Calculation (Detailed Breakdown)
Let’s walk through an example of how to calculate a blended interest rate for two loans:
- Loan 1: $500,000 mortgage at 6%
- Loan 2: $50,000 second mortgage at 11%
- Total Loan Balance: $550,000
Step 1: Calculate the Proportion of Each Loan
Step 2: Multiply Each Loan’s Proportion by its Interest Rate
Step 3: Add the Two Results Together
- 5.454% + 1.001% = 6.455%
Final Blended Rate: 6.455%
This blended rate gives you a clear understanding of the total interest cost of carrying both loans. If you were to get a new loan at a rate lower than 6.455%, refinancing would save you money. If the new loan has a rate higher than 6.455%, you’d end up paying more.
Why Knowing Your Blended Rate is Important (Benefits & Applications)
Understanding your blended rate is essential when deciding whether to refinance or consolidate loans. It helps you see the big picture and compare the cost of keeping your existing loans against getting a new, consolidated loan.
Benefits of Knowing Your Blended Rate:
- Compare current loans to refinancing options.
- Understand if consolidating loans will save you money.
- Make informed financial decisions based on actual numbers.
When Should You Consider Your Blended Interest Rate? (Situations & Scenarios)
There are several scenarios when knowing your blended rate can help you make better financial decisions:
1. When Refinancing
- Compare your blended rate to the rate offered on a new loan.
- If the new rate is lower, refinancing could reduce your total interest payments.
2. When Taking Out a Second Loan
- Adding a second loan to your existing mortgage will increase your overall interest burden.
- Knowing your blended rate helps you determine how much more interest you’ll be paying.
How to Use Blended Interest Rates to Save Money (Tips & Strategies)
Here’s how you can use blended rates to make smarter financial decisions:
1. Comparing Refinancing Options
- If your blended rate is higher than the rate you could get on a new loan, refinancing may save you money by consolidating two loans into one with a lower interest rate.
- Lower monthly payments and reduced interest over the life of the loan are potential benefits.
2. Identifying Debt Consolidation Opportunities
- Blended rates are useful for evaluating whether consolidating debts like credit cards, personal loans, or home equity loans into a single mortgage will save you money.
- Compare your blended rate to the interest rate on a potential new loan to see if you’ll save on overall interest payments.
Mortgage Mark’s Pro Tip
You don’t have to calculate your blended rate on your own—our team at Mortgage Mark is here to do the math for you. We’ll help you understand your options and make the best financial decision based on your unique situation. Whether you’re looking to refinance, consolidate debt, or take out a second loan, we’re here to guide you.
Why Blended Interest Rates Matter (Key Takeaways)
Blended interest rates are a powerful tool for understanding the true cost of borrowing when you have multiple loans. They allow you to compare different loan scenarios and decide whether refinancing, consolidating debt, or maintaining your current loans is the best option for your financial goals.
By knowing your blended rate, you’ll be better equipped to make smart financial decisions that align with your long-term objectives. Contact our awesome Dallas, Texas based mortgage loan team and remember, when you think mortgage, think Mark!
Mark Pfeiffer
Branch Manager
Loan Officer, NMLS # 729612
(972) 829-8639
MortgageMark@MortgageMark.com