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How to Calculate a "Blended Average" for Interest Rates

 
When determining whether to refinance multiple loans, a "Blended Average" (aka "Weighted Average") between interest rates is a great place to start.  Oftentimes, Homeowners fall in love with their 1st Mortgage, but turn a blind eye to the interest rate on their 2nd mortgage and/or credit cards when considering a debt consolidation mortgage refinance. 
 
 
A simple example is as follows:
1st Mortgage $200,000 balance 4.000% Interest Rate 2nd Mortgage $200,000 balance 8.000% Interest Rate  
In looking at the above scenario, we can easily calculate that the Blended Average Interest Rate (aka Weighted Average Interest Rate) is actually 6.000%.  Therefore if current market rates were 5.000% to consolidate these 2 mortgages, it would actually be a good idea to at least consider this option (depending on how long the Homeowner intended on keeping these loans, the property, etc.).
 
The challenge from a loan origination perspective however, is helping the Homeowner/Borrower understand that they are not simply replacing a 4.000% rate for a 5.000% rate (which would not be prudent), but instead, replacing a 6.000% blended average interest rate (aka weighted average interest rate) of 6.000% with a 5.000% rate (which makes more sense).
 
Of course, we do not typically get such easy scenarios to analyze, ... more

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