Congratulations! If you were one of the millions of Americans who bought a home over the last four to five years and took advantage of historically low mortgage interest, you’ve no doubt enjoyed watching as your property increased in value year after year.
But how quickly times and the real estate market have changed!
Now you may find yourself in a situation where you’ve outgrown your current home and really want to buy a new one but feel trapped because you don’t want to give up that extremely low mortgage rate. Even worse, while your mortgage payment has stayed the same, all of your other debt keeps going up. Higher car payments, burgeoning credit card balances and student loan payments now total more than your mortgage each month, and you’re not sure what to do.
It may be time to give up that lower mortgage rate, sell your home, pay off debt and buy that new home you have your eyes on.
The key to determining whether this scenario would be a good financial strategy for you is something called a “blended rate.”
What is a blended rate?
A blended rate is the weighted average of ALL interest rates you’re paying on ALL of your debt. If the weighted average rate on your current debt (mortgage, car loans, credit cards, student loans, etc.) is greater than the interest rate on a new mortgage, then you could consider selling and buying a new home — even with a higher rate.
It sounds complicated but the idea is pretty simple. Let’s take a look at an example:
Say you currently owe $200,000 on a mortgage at 3.5% on your home that’s valued at $450,000. In addition, you owe $50,000 in student loans at 9.2%; $40,000 in credit card debt you’re paying 21% interest on; and a $30,000 car loan at 8.75%. That brings your total monthly payments to $3,000 (excluding taxes and insurances). Your blended rate on your monthly payments would be 7%.
Now, let’s say you want to sell your home and buy a new one for $500,000 and pay off all your debt. You put down $100,000 (20%) on the new house and assume a new $400,000 mortgage. Using a blended rate strategy, you could get a special incentive rate of 5.99% (6.309% APR)* from Offerpad Mortgage that would leave you with a monthly mortgage payment of just $2,395 (excluding taxes and insurances) – a $600 per month savings versus keeping your old home and mortgage at the original lower interest rate.
This option is particularly attractive if you haven’t been paying on your student loans for the last three years and now face a large increase in your monthly debt. (Just a reminder that the pause on student loans ends in October.)
Timing is everything
With current mortgage rates averaging over 7% and consumer debt being at an all-time high, it’s no wonder many homeowners are holding on to their home’s lower rate rather than selling and buying a new home at a higher one. But if you are interested in selling and buying a home now, speak with a Loan Specialist at Offerpad Mortgage for more information on how a blended rate may work for you.
RELATED READ: When Should I Consider a Blended Interest Rate on Loans?
* If homeowner sold their home to Offerpad and used an Offerpad agent to buy new home. Contact Offerpad Mortgage for details on special incentive rates. Offerpad Mortgage, LLC, is an Equal Housing Lender. As prohibited by federal law, we do not engage in business practices that discriminate on the basis of race, color, religion, national origin, sex, marital status, age (provided you have the capacity to enter into a binding contract), because all or part of your income may be derived from any public assistance program, or because you have, in good faith, exercised any right under the Consumer Credit Protection Act. The federal agency that administers our compliance with these federal laws is: Federal Trade Commission, Equal Credit Opportunity, Washington, DC 20580.
Consumers wishing to file a complaint against a company or a residential mortgage loan originator should complete and send a complaint form to the Texas Department of Savings and Mortgage Lending, 2601 North Lamar, Suite 201, Austin, Texas 78705. Complaint forms and instructions may be obtained from the department’s website at www.sml.texas.gov. A toll-free consumer hotline is available at 1-877-276-5550. The department maintains a recovery fund to make payments of certain actual out of pocket damages sustained by borrowers caused by acts of licensed residential mortgage loan originators. A written application for reimbursement from the recovery fund must be filed with and investigated by the department prior to the payment of a claim. For more information about the recovery fund, please consult the department’s website at www.sml.texas.gov.
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Do Your Own Research
The content in this blog is intended to be used for informational and educational purposes only. It is not intended to provide individual financial, tax or legal advice. It is very important to do your own analysis before making any financial decisions based on your own personal circumstances. Consulting an independent financial advisor on information contained here is highly recommended.