Blended Rate Calculator Mortgage: How to Find Your True Cost of Borrowing

The blended rate is the single most important calculation for homeowners who already have a low-rate first mortgage and are considering extracting equity. It's also the calculation lenders almost never show you — because it frequently demonstrates that a cash-out refinance is the wrong move.

Here's how to calculate it.

What a Blended Rate Is

When you have two loans secured against the same property — a first mortgage and a HELOC, for instance — your effective cost of borrowing is a weighted average of both rates, based on the outstanding balance of each.

The blended rate formula:

(Balance A × Rate A + Balance B × Rate B) ÷ (Balance A + Balance B) = Blended Rate

This is essentially a weighted average, where larger balances carry more weight in the calculation.

The Core Use Case: Cash-Out Refi vs. Keeping Your Low-Rate Mortgage

Suppose you have a $280,000 first mortgage at 3.0% from 2021 and you need $70,000 for a home addition. You have two primary options:

Option 1 — Cash-out refinance at 6.75%: Replace the entire mortgage with a new $350,000 loan at 6.75%. Annual interest cost: $350,000 × 6.75% = $23,625/year

Option 2 — Keep first mortgage, add HELOC at 9.0%: Keep $280,000 at 3.0% and borrow $70,000 via HELOC at 9.0%.

Blended rate calculation: ($280,000 × 3.0% + $70,000 × 9.0%) ÷ $350,000 = ($8,400 + $6,300) ÷ $350,000 = $14,700 ÷ $350,000 = 4.20%

Annual interest cost under Option 2: $350,000 × 4.20% = $14,700/year

The difference: $23,625 − $14,700 = $8,925/year in additional interest under the cash-out refinance.

Over 10 years, assuming the HELOC gradually pays down and the rates stay stable, the two-loan structure saves roughly $60,000–$80,000 in interest compared to surrendering the 3% first mortgage.

This is why lenders receive criticism for aggressively pitching cash-out refinances to borrowers with pandemic-era rates. The math is unfavorable for the borrower in most cases.

When the Blended Rate Comparison Favors a Cash-Out Refi

The two-loan structure isn't always better. The cash-out refinance wins when:

Your first mortgage rate is near current market rates. If you're at 7.0% on your first mortgage and cash-out rates are 6.5%, there's no low-rate first mortgage to protect. Consolidating into one loan is often cleaner and simpler.

The HELOC rate is extremely high relative to the cash-out rate. If HELOC prime-indexed rates spike and you're looking at 12%+ on the second lien, while a cash-out refi is available at 6.5%, the blended rate math may favor consolidation. Calculate both scenarios — don't assume the two-loan structure always wins.

You need certainty on rate. HELOCs are variable rate instruments. If the HELOC makes up a large portion of your total debt and rates rise, your monthly obligations can increase substantially. A fixed-rate cash-out refinance eliminates this exposure.

You need more cash than a HELOC can provide. Lenders typically allow combined LTV of 80–90% for a HELOC (first mortgage + HELOC balance). A cash-out refinance can sometimes access equity up to 80% LTV on the single combined loan, which may produce a different available amount.

Calculating the Blended Rate for Multiple Mortgages

If you have a first and second mortgage (not a HELOC), the same formula applies:

($500,000 × 5.5% + $80,000 × 7.25%) ÷ $580,000 = ($27,500 + $5,800) ÷ $580,000 = $33,300 ÷ $580,000 = 5.74%

This gives you the weighted average cost of carrying both balances. When evaluating whether to refinance the second, you're comparing the cost of the second alone (7.25%) against what you'd pay if you collapsed both into a new single loan.

How the Blended Rate Affects the Cash-Out Decision

The blended rate framework helps you avoid a common analytical error: comparing the HELOC rate in isolation against the cash-out rate.

"My HELOC is at 9% and the cash-out refi is at 6.75% — the cash-out is cheaper."

This framing is wrong if it ignores what happens to the existing first mortgage balance.

The correct comparison is:

• Blended rate of keeping first mortgage + HELOC vs.
• Single consolidated rate of the cash-out refi

In almost every scenario where the first mortgage rate is below 5% and cash-out rates are above 6%, the blended rate favors the two-loan structure.

Factoring In the Amortization Reset

Even if you calculate the blended rate and it's slightly worse than the cash-out rate, the two-loan structure may still be superior on a lifetime basis because it doesn't reset your first mortgage's amortization.

If you're 8 years into a 30-year first mortgage, you've already survived the most interest-heavy years. The balance of principal-vs-interest in your monthly payment has shifted in your favor. Refinancing resets you to Year 1 of amortization on the full balance — which means years of front-loaded interest all over again, even at a lower rate.

A proper analysis compares:

1. Blended rate comparison (annual interest cost)
2. Lifetime interest paid under each scenario (accounting for term reset)
3. Payback period on closing costs

All three calculations should point in the same direction before you commit to a cash-out refinance.

Blended Rate in Australia and Canada

Australia: Variable-rate first mortgages and HELOCs (often called "home equity loans" or offset accounts) are common. The blended rate framework applies directly, though Australian HELOCs may have different fee structures. Be aware that if you refinance to a new lender while your LVR is above 80%, you may trigger a new round of Lenders Mortgage Insurance.

Canada: The Canadian "re-advanceable mortgage" bundles a first mortgage with a HELOC in a single product — as you pay down the mortgage, the HELOC limit increases automatically. This is the structure used in the Smith Manoeuvre strategy, where HELOC drawdowns are invested and the interest becomes tax-deductible. The blended rate concept still applies, though the single product structure makes the calculations slightly different.

If you're weighing a cash-out refinance against a HELOC, the Refinancing Decision Worksheet includes a dynamic blended rate calculator. You input your existing mortgage balance and rate, the desired cash amount, the cash-out refinance rate, and the HELOC rate — and it shows you the blended rate under both scenarios alongside a lifetime interest comparison.