The Blended Mortgage Rate

The middle ground between a fixed rate and a variable rate interest rate is the blended rate mortgage. If a borrower accidentally fixes in their interest rate at a point that is too high, banks will sometimes offer to partially match lower rates so as to keep ownership of the loan. This is useful for situations where interest rates have decreased, but not by enough to make it economical to transfer the loan to renegotiate the loan.

For example, if it costs a borrower a 2% charge to have their mortgage bought out, and the interest rates have only decreased by 3%, there is not really enough room for another bank to profit from taking over the loan and paying the buy-out penalty. However, the rate is getting close enough to buy-out territory that the bank might be willing to take some preventative action here.

This is usually accomplished by offering to split the difference on the interest rates until they increase again. So long as the interest rate is 3% lower than the original amount, the bank will allow the borrower a 1.5% discount on their loan rate. However, as soon as the rates increases again, the borrower will be back at the originally agreed upon rate. Regardless, it gives the investor a little bit of wiggle room to work around.

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