Blend and extend: what your lender is really offering

You are two years into a five-year term at a rate well above today's. You could break the mortgage, pay the penalty and take the new rate — or your lender can offer to blend. Blending averages your existing rate across the months you have left with today's rate across an extension, gives you the average as your new contract rate, and resets the term. There is no penalty, because nothing was broken.

The average is time-weighted, which is the part worth understanding: the more months left on your old rate, the more the blend is dragged toward it. Two years left on a five-year extension means two-fifths old rate and three-fifths new. The same offer a year later would be materially better, because there is less of the old rate to carry.

Some lenders will also advance new money in the same transaction, drawn at today's rate rather than the blend. That is a different product — a blend-and-increase — and it changes the arithmetic, because the added principal is not carrying any of your old rate.

Blending is not free; it just does not come with an invoice. What it costs is the gap between the blended rate and today's rate, paid every month for the whole new term. What it saves is the penalty you did not pay.

So the question is arithmetic: how many months of that gap does the avoided penalty cover? If the answer is longer than the term you are signing, blending is the cheaper move. If it is shorter, breaking and taking the market rate wins — and the difference can be several thousand dollars either way.

Two things the comparison needs that lenders present asymmetrically. The penalty is knowable exactly and your lender will quote it if asked; the blended rate they will quote without being asked. And a penalty on a big-bank fixed mortgage is usually calculated with the posted-rate method, which makes it large — which makes blending look better, which is not an accident of arithmetic so much as a feature of how the two are priced.