Mortgage Combos and Blended Rate

Quite often borrowers will need to take out two loans simultaneously to finance their property. And the way you structure your loans could save you a ton of money on your mortgage payment every month.

Most banks and lenders only allow LTVs up to 80% because loan amounts exceeding 80% LTV are hit with PMI, or Private Mortgage Insurance. Homeowners can avoid costly PMI by keeping their first loan at 80% LTV or less, and adding a second mortgage up to 100% CLTV.

Because the homeowner broke up their mortgage into two separate loans, likely with two separate banks, they can avoid paying PMI. On top of that, they can also enjoy a lower blended rate than simply doing one loan at say, 90-100% CLTV. It’s become a popular practice, but every homeowner should understand how to figure out blended rates.

Let’s look at a quick example:

Purchase price: $500,000

Loan amount: $450,000

A borrower could finance one loan at 90% LTV at a rate of 8% and pay PMI. Or the borrower could do a 1st mortgage at $400,000 at 80% LTV at a rate of 6.5%, and a piggyback 2nd mortgage for $50,000 at 90% CLTV at a rate of 9%.

If we blend the two interest rates together, we come up with a combined rate of 6.778%. A huge savings as compared to 8% for a single loan and PMI on top of that. Sure there are fees for a second mortgage that need to be considered, but not when the difference in interest rate is so great.

Sometimes a blended rate is a necessity, and sometimes a blended rate is a cost-saving measure. Some banks and lenders don’t allow LTVs over 80%, so anyone financing more than 80% CLTV will need to do two loans. In another example, a borrower may break up an 80%LTV loan into a 65% 1st mortgage, and a 15% 2nd mortgage just for the sake of securing a better interest rate.

Always check out the blended interest rate to see how much it may save you on your overall mortgage payment. It’d be foolish not to take out some time in your day to look at all the possible scenarios. Keep in mind that 2nd mortgages are often more expensive than 1st mortgages, but because of the smaller loan amounts, you’ll be able to pay them off quickly and save money in the long run.

Use my blended rate calculator to see if two loans are cheaper than one:

Blended Rate Mortgage Calculator