Blended Rate Financing Sources
A blended rate mortgage loan may be utilized when a real estate lender holds loans that were made at interest rates below the current market.
Suppose you owe $50,000 on your home loan and the interest rate on it is 7%. Suppose further that the current rate on home loans is 12%. Your lender might offer to refinance your home mortgage for $70,000 a 9%, or $100,000 at 10½%, presuming the property will appraise high enough and you have the income to qualify. The $70,000 refinance offer would put $20,000 in your pocket (less loan fees), but would increase the interest you pay from 7% to 9% on the original $50,000. This actually makes the cost of the $20,000 14% per year.
With the $100,000 loan, you would be giving up the 7%, $50,000 loan you now have. This makes the cost of the extra $50,000 14% per year. That is the figure you should use in comparing other sources of financing (such as a second mortgage) or deciding whether you even want to borrow.
A blended-rate loan can be very attractive in a situation where you want to sell your home and you do not want to help finance the buyer. Suppose your home is worth $125,000 and you have the above described $50,000, 7% loan. A buyer would normally expect to make a down payment of $25,000 and pay up to 12% interest on a new $100,000 loan. But with a blended loan your lender could offer the buyer the needed $100,000 financing at 10½%, a far more attractive rate and one that requires less income in order to qualify. Blended loans are available on FHA, VA, and conventional loans held by the FNMA. Other lenders also offer them on fixed-rate loans they hold.
Blended Rate Loan To Buy Downs