A blended rate is an interest rate that is created when a loan is refinanced at a different rate than was applied to the original loan. What makes the blended rate unique is that the original rate of interest still applies to the amount of the loan that is outstanding at the time of refinancing. The new rate of interest is applied to any additional funding that is extended to the borrower as a result of the refinancing of the loan. Generally, the rate of interest extended on the additional funds is granted at a rate that is less that the current market standard.
Debtors who need to engage in refinancing can benefit from earning a blended rate rather than attempting to roll an old loan into a new one. Often, a combination of the previous rate and the new loan rate will result in a lower rate of interest than what can be realized by obtaining a loan that would pay off the existing loan and still provide the additional funds required. It is not unusual for lenders to be quite willing to extend a blended rate to existing clients, especially when the lender currently holds the mortgage on property in the possession of the borrower. Extending a lending rate that is blended is also an excellent way to keep a current customer from shopping around for a better deal from other lenders.
Different lenders will track the blended rate in different ways. In some instances, the lender will provide documentation that applies a percentage of each monthly payment to the loan amount covered by each rate of interest. For example, each monthly payment may be allocated to cover principle and interest for 75% of the remaining original amount, while the remaining 25% is applied to the additional funding that was provided as a result of the refinancing.
A more common approach is to calculate an average rate that is determined by combining the original rate of interest with the new rate and dividing by two. The average rate applies to the entire outstanding balance, which provides the borrower with one rate of interest to maintain.