Did you know that when you finalize your mortgage term, you have the option to not be stuck with the interest rate you had at the time without paying a hefty penalty fee? That’s right — you can wash your fears that come with being stuck in a term away!
Blended mortgages are when you take the current interest rate of your mortgage and combine it with the new lower rate, which in turn creates a blended rate between the two. Because you’re not leaving your original mortgage term, you avoid the penalty fee. Within blended mortgages, there are two types to choose from — the “blend and extend” and the “blend to term.”
Blend and Extend
The blend and extend option means that when you decide to blend your mortgage, you create a new 5-year term. For example, if you have 3 years left of your mortgage term and you decide to blend your mortgage, you create a new 5-year term at the new blended rate. If your current rate is 4%, and the new rate for a 5-year term is 2%, your new blended rate for 5 years could be as low as 2%.
Blend to Term
The blend to term option means you are only blending your mortgage for the remainder of your original term. For example, if you have 2 years left when you blend your mortgage and don’t want to extend, the new blended mortgage rate pulls from the lower rate for the 2-year term. If your current rate is 4% and the new 2-year term is 3%, your new blended rate for the remaining 2 years could be as low as 2%.
However, because you are not extending, your lender loses money. This means the lender will likely only offer this option to you if you are accessing equity to increase your mortgage amount, increasing the amount you pay your lender during the remainder of your term. Your lender may also choose to charge you a portion of the penalty fee you would pay when breaking a mortgage to make up for lost money.
Let’s put it into perspective how much you could be saving when you blend your mortgage:
If you have a $500,000 25-year mortgage (5% down) at an interest rate of 5%, your monthly payments are $2,873, equaling a total amount of $172,380 after 5 years.
If you have the same mortgage but at an interest rate of 2%, your total amount after 5 years is $125,520.
That’s a $46,860 difference you could be saving!
Plus, you don’t lose potentially thousands of that money in penalty fees.
Blended mortgages are a great way to lower your payments without paying the unwanted penalty. Not every mortgage provider offers blended mortgages, or may only offer one of the types rather than both, so get in contact with your mortgage specialist and find the best plan for you! Some banks may even offer mortgage blends for those on a variable term.
We hope this helpful blog brings you one step closer to saving money for you and your family and eliminates any fear you have of finalizing your mortgage renewals.
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