Tackle debt with a blended rate
Many homeowners who bought or refinanced their mortgage in the last 5 years were able to take advantage of historically low mortgage rates. Between 2020 and mid-2022, mortgage rates hit their lowest averages in 50 years, with some homeowners able to get mortgages with rates near 2.75% in some cases. Compared to where rates are today, that’s a big difference.
If you have a mortgage rate lower than where they are currently, you’re probably not thinking about refinancing and giving up that lower monthly payment for something that may be higher. But that means that you could be missing out on taking advantage of the equity you’ve built up in your home. If you find yourself in that position, there’s a way to think about your monthly debt payments that may cause you to reconsider refinancing. It’s called a blended rate.
Understanding your blended rate could help you get a better understanding of your current debt and open up new ways to manage your finances.
What is a blended rate?
Managing multiple loans or debts with different interest rates can feel overwhelming. A blended rate simplifies things by combining all those rates into a single, weighted average. It gives you a clearer view of your overall borrowing costs, helping you make more informed decisions.
Picture this: you have two loans—one is your mortgage with a large balance and the lower interest rate you were able to lock in when rates were low. The other may have a smaller balance at a higher rate. Rather than looking at them individually, calculating their blended rate let’s you look them as a single, weighted average.
Looking at your debt obligations in this way allows you to better consider the potential benefits of a cash-out refinance. While a new mortgage rate might seem higher initially, it could actually lower the total cost of managing credit cards or other loans. Combined, you could be paying less each month, even with a higher mortgage rate.
Using a blended rate to tackle debt
Figuring out your blended rate comes in handy when you’re deciding whether to do a cash-out refinance and use those extra funds to pay down or consolidate debt from another loan. This is an effective strategy for handling debt from:
- Student loans
- A home equity line of credit (HELOC) or other secondary mortgage
- Auto loan
- Credit cards
Though it’s hard to let go of a really low mortgage rate, when you look at the blended interest rate of all your debts, a higher mortgage rate could actually mean more savings compared to the high costs of other debts, like credit cards or personal loans.
How blended rates simplify cash-out refi decisions
A cash-out refinance lets you replace your existing mortgage with a new one for a higher amount, allowing you to take the difference as cash. For instance, if your home is worth $250,000 and you owe $150,000, you could refinance for $200,000 and receive $50,000 in cash. You can use those funds for financial needs like debt consolidation or home improvements.
However, you’ll refinance into a new mortgage rate, one that reflects the prevailing rates of the time you’re refinancing. So, if you got a sub-3% mortgage in 2021, as an example, your refinanced mortgage wouldn’t have the same interest rate, but one closer to today’s rates.
But if you use the excess funds you get from the refinance to pay down another loan, it may still make perfect sense to refinance into a higher rate. By understanding the blended rate of those two (or more) loans, you’ll be able to see if your total monthly payment will go down and make an informed decision about a cash-out refi.
How to calculate your blended rate
To get a rough idea of the blended rate of two of your loans, the formula is pretty simple:
Blended rate = (Balance of loan A times the Rate of loan A ) plus (Balance of loan B times the Rate of loan B) divided by the Total balance of both loans
If there are more than two loans being considered, you’d just add the balance of those loans, multiplied by their rate, and add together before dividing the total balance of all of these loans.
Let’s look at an example. Let’s say you purchased a home in March of 2022 and closed with a mortgage rate of 4.5%. You’re probably wishing that you’d bought a year earlier when rates were in the mid-3% range, but overall you’d be happy with your rate as they have only gone higher since then. You’d be very hesitant about refinancing into today’s higher rates. For the purposes of this example, let’s say you have a balance of $250,000 on your mortgage.
Also in this example, you also are dealing with $150,000 in student loans from a graduate degree. Your interest rate on that loan is 9%. Here’s the blended rate calculation:
Blended rate = ($250,000 x 0.045 + $150,000 x 0.09) / $400,000
= ($11,250 + $13,500) / $400,000
= $24,750 / $400,000
= 0.061875 or 6.19%
The blended rate of these two loans is 6.19%. Mortgage rates were around 6.19% in September of 2024, making that a great time to do a cash-out refinance and potentially save on your overall monthly payments for all of your loans.*
Benefits of a cash-out refi to consolidate debt
Cash-out refinancing could be a smarter way to access funds because it typically offers lower interest rates than personal loans or credit cards. By leveraging the equity in your home, you could consolidate higher-interest debt into a single, more manageable payment—potentially saving you money in the long run.
To qualify for a cash-out refinance you’ll need a strong credit score, a favorable loan-to-value (LTV) ratio, and a stable income. Most lenders prefer a credit score of at least 620, though government-backed loans like FHA or VA may be more flexible. You’ll typically need 20% equity in your home for the best terms, as lenders generally allow borrowing up to 80% of your home’s value.
Factors like your home’s equity, its appraised value, and your current mortgage balance determine how much cash you can receive. Costs include origination fees, closing costs, and possibly private mortgage insurance (PMI) if your LTV exceeds 80%.
When two loans become one
The blended rate is extremely useful for understanding the potential benefits of a cash-out refinance. But this calculation alone is just the start, talking to one of our expert loan officers can really unlock all your options to use your home equity to tackle debt.
If you're ready to tap into your home’s equity and start tackling debt, our Cash-out Refinance makes it simple to get the funds you need. Start today and unlock financial flexibility.
* Sample loan scenarios do not include advertised rates, are provided for illustration purposes only and are not intended to provide mortgage or other financial advice specific to the circumstances of any individual and should not be relied upon in that regard. Rate cannot predict where rates will be in the future.
Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Refinancing your mortgage may increase costs over the term of your loan. Restrictions may apply.
Savings, if any, vary based on the consumer’s credit profile, interest rate availability, and other factors. Contact Rate for current rates. Restrictions apply.
Using funds from a Cash-out Refinance to consolidate debt may result in the debt taking longer to pay off as it will be combined with borrower’s mortgage principle amount and will be paid off over the full loan term. Contact Rate, Inc. for more information
Rate Inc. is a private corporation organized under the laws of the State of Delaware. It has no affiliation with the US Department of Housing and Urban Development, the US Department of Veterans Affairs, the Nevada Department of Veterans Services, the US Department of Agriculture, or any other government agency. No compensation can be received for advising or assisting another person with a matter relating to veterans’ benefits except as authorized under Title 38 of the United States Code.
