BOULDER – The financial forecast is one with rising temperatures: the Federal Reserve is predicted to raise the Prime Rate as many as three times this year. This is important because home equity lines are directly tied to the prime rate. When the rate goes up, the interest and the payment for equity lines go up, too.
For homeowners who are refinancing, timing is vital – what the Feds do helps predict what you will pay. But combining a current mortgage with an equity line is an option. Some fail to do this because the first mortgage is locked in a rate lower than what’s presently available; this is where a blended interest rate comes into play.
A blended rate considers the amount of each loan in relation to the total amount of loans. It is not the average interest rate (which is a common assumption). It is not determined by adding all the interest rates together and then dividing by the number of loans. Rather, it’s a rate that takes into account the amount of each loan in relation to the total amount of all loans. A correct blended rate can only be calculated if all loans are paid off at the same time.
In general, blended rates are typically higher than an old loan’s interest rate, but they’re lower than new loans, providing middle ground for the borrower.
A blended rate is not limited to homebuying. Some people access these rates by taking out multiple loans with a lower interest rate rather than one loan with higher interest. It’s especially beneficial to homeowners because it allows them to secure a lower rate, saving some money. With the Federal Reserve making a move, the time to act is now.
By Michaela Phillips, Guaranteed Rate, Inc. Michaela is the Vice President of Mortgage Lending at Guaranteed Rate, Inc. Contact Michaela at 303.579.5517, e-mail email@example.com or visit michaelaphillips.com. NMLS:312874.