Blended Rate Refinance: Calculating the True Cost

The lock-in effect keeps many borrowers from touching their existing first mortgage. A blended rate analysis gives them a real comparison between a cash-out refi and a second lien strategy.

How to Calculate the Blended Rate

The blended rate is the weighted average of the first mortgage rate and the second lien rate, weighted by outstanding balance. If a borrower has a $300,000 first at 3.5% and needs a $100,000 HELOC at 9%, the blended rate is ((300,000 x 0.035) + (100,000 x 0.09)) / 400,000 = (10,500 + 9,000) / 400,000 = 19,500 / 400,000 = 4.875%. Compare this blended rate against the available cash-out refi rate to determine which is lower.

When Second Liens Win

• ✦Existing first rate is below 4%: keeping the first and adding a second almost always beats a cash-out refi at current market rates
• ✦Small cash-out need relative to first balance: the second lien carries the high rate on a smaller amount, keeping the blended rate low
• ✦Short holding period: cash-out refi adds years of higher payments; a HELOC drawn and paid quickly is cheaper in total cost
• ✦Closing cost sensitivity: second liens typically have lower origination costs than a full cash-out refi

When Cash-Out Refi Wins

• ✦Existing first rate is near current market (5%+): the blended rate advantage of keeping the first is minimal
• ✦Large cash-out need relative to first balance: the high second lien rate applies to too large a portion of the combined debt
• ✦Borrower wants payment simplicity: one payment instead of two
• ✦Second lien pricing is prohibitive: HELOC variable rate environment or tight home equity market