Like many towns and villages around Iceland, Blönduós did not emerge as a village until the late 19th century. The town is situated on Route 1 at the mouth of the glacial river Blanda. Hrútey, a small island and natural reserve encircled by the river, is accessible via a pedestrian bridge just off the ring road.

One of Blönduós' main characteristics is that the town is split into two parts by the glacial river Blanda, for which it is named (Blöndu is an oblique case of Blanda). The old part of town (Icelandic: "gamli bærinn"), including many original houses from the late 19th and early 20th century, is located on the south side of the river. Many of the local companies, the elementary school, supermarket, community center and sports facilities including a modern outdoor heated pool are located on the north side. On a hill above town is a church with striking architecture that is intended to resemble a volcanic crater.

Most of the industry and livelihood in Blönduós evolve around service for agriculture and tourism. In recent years, the town has become known for its connection with textiles. A wool washery, Iceland's only textile museum Heimilisiðnaðarsafnið [is] and the Icelandic Textile Center, featuring a residency program for international textile artists and scholars, are all located in Blönduós.