Would You Like Your Mortgage Blended, Shaken or Stirred?

Many home owners have two mortgages on their properties.  A first mortgage and a second mortgage that may either be fixed or a home equity line of credit.    Do you know what your effective rate is?   Basically, this is if you factor in what your paying on both mortgages, and then figured out what your interest rate is on your payment. 

Here's how to determine what your "blended rate" is:

1. Take your current mortgage balances and multiply that times your interest rate.  This equals your interest expense.
2. Add both mortgages interest expense together.
3. Add both mortgage balances together.
4. Divide the total interest expense by the total mortgage balances.   This provides you with your blended (of effective) interest rate of both mortgages.

Let's run through this with real numbers:

1. 1st Mortgage with a balance of $200,000 x 6.25% interest = $12,500.   2nd Mortgage with a balance of $50,000 x 8% interest = $4,000.
2. $12,500 + $4,000 = Total interest expense of $16,500
3. $200,000 + $50,000 = Total mortgage balances of $250,000
4. $16,500 (total interest) divided by $250,000 (total mortgage balances) equals an blended rate of 6.6%.

This formula can be used on new or existing mortgage scenarios.   As you pay down your mortgages, the blended rate will change.  Especially if you're paying extra towards a second mortgage with a higher rate.

Sometimes homeowners opt for a second mortgage instead of refinancing their first, hanging on to what they feel is a favorable rate.   This may be the best option, depending on if they feel they're going to be coming into cash to pay off the higher interest rate second mortgage, or if they are disciplined enough to pay additional towards the principle on the second to reduce the term.   There may also be tax advantages for not refinancing the first mortgage as well (always check with your CPA).

If a borrower is getting a higher interest rate second mortgage because they don't want to "touch" their first mortgage with a lower rate, but they do not have intentions or means of paying down or eliminating the second mortgage, reviewing what the actual effective rate or blended rate may be very well worth considering in order to determine what the mortgage strategy should be.

There are also many other factors to consider when selecting a mortgage such as how long one plans on retaining the property and what they predict their incomes will do in future, etc.    This is why it's important to review your mortgage and financial goals with a Mortgage Planner.