As a mortgage agent, I have seen many large institutions offer a product known as the blend and extend mortgage rate product. A blend and extend mortgage is where a mortgage lender may allow me to take out a new loan amount on my existing mortgage and extend the length of the mortgage before the end of my mortgage term. This is accomplished by blending my old interest rate with the new term’s rate at the time of my application. In mortgage financing, this is often referred to as the “blend and extend” early renewal option.
A blended mortgage allows me to access more funds from the mortgage on my property without having to break the existing mortgage to refinance. One of the main benefits here, is that I may avoid the costs associated with a pre-payment penalty owed when one breaks an existing mortgage. Let’s assume I have 24 months remaining on my mortgage term at a rate of 4%. To make this point clear, consider that the current 5-year mortgage rate is being offered at 3%. If I chose to make use of the blended mortgage with and extended term option, I would pay 4% for the first 24 months and 3% for the remaining 3 years on the new 5-year term I acquired via the blend and extend option.
Many mortgage agents and lenders may not be aware of this method, or for other reasons, decide not to bring this method of blending a mortgage, to the table of options, when considering the refinancing process of a mortgage. In my opinion, however, its best to explore all available options, when considering a mortgage refinance, and one in particular, one that may allow for me to avoid any pre-payment penalties or interest owed as a result.
Why would I want to blend and extend my mortgage instead of a second mortgage?
The blended option may be a smart decision, if I can fulfill the following criteria:
- a)A lowering of my current interest rate via blending the new lower rate with my higher interest rate.
- b)I may be able to avoid a high pre-payment penalty and interest charges that are associated with a conventional refinance of a mortgage in-order to obtain a second mortgage.
- c)I can obtain a blended rate when I want to access equity in my home or just acquire a lower rate than my current rate or a combination of both – access to equity and a lower rate.
If I were seriously considering this as an option, I would always have the lender work with me when crunching the numbers on my behalf so as to be certain as to what charges may be applicable in my particular scenario. Something that will also allow me the benefit of considering this option and to weigh the cost-benefit implications in this mortgage refinance process.
Are there any risks associated with a blend and extend mortgage?
The process of a blend and extend is fairly straight forward and can be easily applied for via a lender’s retail branch location. However, it is important to ask the right questions as well, as to what the lenders opinion is to this method of refinance and why the lender would agree/disagree with my application for this product. Other factors to also keep in mind are:
- If the lender applies fees or prepayment charges, the costs may outweigh the benefits of any savings using this product. I would make sure the lender provides me with all costs in writing. Also, ask the branch representative if they have performed a blend and extend themselves prior. It would be useful to deal with a senior staff member who has experience with this mortgage product.
- If I was planning to sell my property soon, I may not be in a position to realize any savings after renegotiating a new lower rate. It is important to note that the savings are applicable specifically during the new term of the mortgage, for which I will benefit from the lower negotiated rate. So, this may not be a good idea, if I was looking to sell my home and move soon.
- Mortgage interest rates may continue to drop after my rate negotiation, which may be an issue when I lock in my new rate, however, a lower rate than what I am paying at the time is beneficial, given, not many of us have a crystal ball, so as to ascertain where rates will be going in the unforeseen future.
As always, if you would like to discuss any mortgage related inquires or your second mortgage needs, do not hesitate to email or call me at the number listed below.