Combining Rates of Two Mortgages

When considering two mortgages rather than a single first mortgage, combining the rates of both mortgages can be a useful tool in your decision-making process. This is especially true if you are thinking of refinancing a single mortgage into two loans. The combination of two rates, called a blended rate, makes it easier to compare the two new loans with your existing first mortgage.

Calculating a blended rate isn’t particularly difficult, but it is harder than simply averaging the two rates. A blended rate weights the average of the rates depending on the loan amount for both mortgages. The blended rate works by adding together the interest payments for both loans over a specified period, and dividing this number by the sum of the loan balances over the same period. If the mortgages have the same term, this weighted average will be equal to the blended rate.

However, often the 2nd mortgage has a shorter term than the first. If the 2nd mortgage has a shorter term, the blended rate will be slightly less than the weighted average calculated by the method above. However, if the weighted average is lower than the rate of your first mortgage, the conclusion that taking a 2nd mortgage in a refinance will remain the same.

For example, suppose you have a mortgage with a balance of $375,000 and an interest rate of 7.8 percent. You are reconsidering a refinance with a first mortgage of $300,000 at six and a half percent and a 2nd mortgage of $75,000 at seven and three quarters percent.

The weighted average of these rates is six and three quarters percent. However, if the 2nd mortgage has a 15-year term, while the first has a standard 30-year term, the actual blended rate would be 6.68 percent. In any case, this example demonstrates that the blended refinance rate would be a better deal for the borrower.