Blended rate refers to the rate of interest which is made available by the lender. A blended rate combines the previous interest rate with the current one.
When a debtor needs to have an existing loan refinanced, the difference between old and new interest rates could be quite big. Blended rates can thus prove to be quite helpful for debtors, especially if the new rates are much higher.
When a borrower opts for a blended rate on his loan, he must keep in mind that at the point at which the loan is refinanced, the original interest rate still applies to the outstanding amount. The blended rate applies to the additional funds granted the borrower through refinancing.
When a lender chooses to offer a blended rate, this is usually quite advantageous for the borrower, since the new rates offered are usually lower than the existing rates in the market. Offering a blended rate is a good way for lenders to keep the loyalty of their debtors, so this is often practiced when the lender already holds the mortgage on the borrower’s property.
Since two different rates are involved in producing a blended rate, it is important for the proper documentation to be provided. This must show how monthly payments are allocated to cover a percentage of the original amount, with the remaining portion covering the additional funding that resulted from the financing.