Blended Interest Rate: How to Determine If a Cash-Out Refi Makes Sense

If you're considering using your home’s equity to pay off debt, fund a renovation, or invest in new opportunities, you’re likely weighing a cash-out refinance vs. a HELOC (Home Equity Line of Credit). But how do you know if refinancing makes financial sense?

The key is understanding the blended interest rate—a simple but powerful calculation that helps you compare your current loan costs with the potential new mortgage rate. In this post, we’ll break down how to calculate your blended rate and when refinancing is a smart move.

What is a Blended Interest Rate?

A blended rate represents the average cost of borrowing when you have multiple loans at different interest rates. If you currently have a mortgage and plan to borrow additional funds at a new rate (via a cash-out refinance or HELOC), the blended rate helps you compare whether refinancing will save or cost you more in interest.

Blended Interest Rate Formula

1️⃣ Comparing a Cash-Out Refi to Keeping Your Existing Loan

‍Example:

• Current Mortgage: $250,000 at 4.5%
• Cash-Out Amount: $50,000 at 7.0%
• New Loan Total: $300,000

‍

Blended Rate = (Current Mortgage Balance * Current Rate)+ (Cash-Out Amount * New Rate)/ Total New Amount Borrowed

($250,000 * .045) + ($50,000 * .07)/ $300,000 = .0492 or 4.92%

‍

If the new mortgage rate is higher than 4.92%, refinancing may increase your overall borrowing costs.

When Does a Cash-Out Refinance Make Sense?

A cash-out refinance can be a great move, but it depends on:

✅ Current Interest Rates Are Lower – If you can refinance at a rate lower than your blended rate, it’s a smart move.

✅ You Need a Large Lump Sum – A cash-out refinance is better for large expenses (e.g., home renovations or debt consolidation) because it provides a fixed rate and structured payments.

✅ You Want Fixed Monthly Payments – Unlike a HELOC (which has variable rates), a cash-out refi offers a fixed interest rate, making budgeting easier.

✅ You’re Consolidating High-Interest Debt – If you’re paying 15%+ APR on credit cards, refinancing at 5-7% can save you thousands in interest—but remember, you’re converting unsecured debt into a loan secured by your home.

When is a HELOC Better?

🔹 You Only Need Small, Flexible Withdrawals – HELOCs let you borrow as needed rather than taking a lump sum.

🔹 Your Current Mortgage Rate is Very Low – If you locked in a historically low rate, it may not be worth refinancing into a higher one.

🔹 You Plan to Pay It Off Quickly – HELOCs typically have a draw period of 10 years with interest-only payments, making them ideal for short-term borrowing.

Final Thoughts

Before committing to a cash-out refinance, compare your new mortgage rate to your blended rate. If refinancing lowers your borrowing costs, it may be a great move. But if rates are rising, a HELOC could provide more flexibility without resetting your entire mortgage.

‍

‍