Blended APR

When thinking of a refinance from one mortgage to a combination of a first and 2nd mortgage, a blended rate can be useful. However, while a blended rate takes into account the rates, amounts, and terms of both loans, there are aspects that a traditional blended rate ignores.

This is where the blended APR, or annual percentage rate, comes into play. The main problem with a traditional rate is that it does not take into account the time value of money.

Traditional blended rates assume that an interest payment in month one has the same value as an interest payment in the final month. Another problem with blended rates is that they ignore the additional upfront costs associated with two loans. A blended APR solves both problems.

Blended APRs account for both the time value of money and upfront costs. If there are no upfront costs, a blended APR often is closely approximated by a traditional blended rate. Therefore, if your 2nd mortgage doesn’t have additional upfront costs, it may be easier for you to simply calculate a blended rate and ignore blended APR.

If you do have upfront costs and want to calculate blended APR in order to compare the two loans to your existing loans, you should be able to find an online calculator that can do the math for you. A blended APR may be one of the best tools for measuring the advantage of two loans as opposed to one for a refinance.

However, a blended APR isn’t a perfect indicator of whether to go for the two mortgages. If you have additional upfront costs, you should consider how long you will be staying in your home after the refinance. If you plan to leave relatively shortly thereafter, you may not be in the home long enough to recoup your upfront investment.