Blended interest rates approximate the overall interest rate of two different amounts being charged different interest rates. Mortgages or savings accounts may require calculations of blended interest rates.
Significance
Homeowners may have a first mortgage at a lower interest rate plus a second mortgage at a higher interest rate. The blended interest rate tells the homeowner what the interest rate would be if the two mortgages were combined.
Function
Blended interest rates allow people to compare different financing options. Knowing the blended interest rate on a first and second mortgage lets a potential buyer know whether it is a better deal than just getting one mortgage.
Calculation
A blended interest rate is a weighted average of the different interest rates involved. For example, someone may borrow $200,000 at 6 percent and obtain another $50,000 at 9 percent. The blended rate is $200,000 times .06 plus $50,000 times .09, all divided by $250,000, to get .066 or a 6.6 percent blended interest rate.
Online Tools
Some online mortgage calculators have features that include a calculation of the blended interest rate. Input the amounts and interest rates of each mortgage to calculate the blended interest rate.
Savings Accounts
Blended interest rates may also apply to savings accounts with promotional features. For example, an account may yield 4 percent interest for the first three months and only 2 percent interest after that. The blended rate would be .04 times 3 plus .02 times 9, all divided by 12, resulting in a 2.5 percent blended interest rate for the first year.
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