HELOC or cash-out refinance? A blended-rate worksheet
By Francisco Williams, CCIM · CCIM · Mortgage Loan Originator NMLS #1858674 · CA DRE #01979442 · Updated
Short answer
If your first mortgage has a low rate, adding a HELOC or fixed second keeps it in place, and you compare the combined cost of both loans. A cash-out refinance replaces the first, so compare closing costs, the new term and total interest. Neither is automatically cheaper. It depends on balances, rates, costs and how long you'll keep the property.
Keep the first
Compute a balance-weighted rate across both loans to compare like for like. It's not an APR. Note that HELOC rates are usually variable and may have draw and repayment periods.
The blended-rate math, without rate quotes
The blended rate is the balance-weighted average of two loans' rates. With a $400,000 first mortgage and a $100,000 second, the first carries 80% of the weight and the second 20%. Multiply each loan's rate by its weight and add them. Compare that figure, plus the second's closing costs, with the cash-out option's rate and costs.
| Line | Keep the first + add a second | Cash-out refinance |
|---|---|---|
| Loan balances | First: $____ · Second: $____ | New loan: $____ |
| Weights | First ÷ total · Second ÷ total | 100% |
| Rates (from your written quotes) | First: __% · Second: __% (variable?) | __% |
| Blended rate | (w1 × r1) + (w2 × r2) | n/a |
| Closing costs | Second's costs | Refinance costs |
| Term reset? | No (first stays) | Yes (new term) |
| Years you'll keep it | ____ | ____ |
Use written quotes from lenders. This site does not quote rates.
Replace the first
One new loan, one payment. Watch the reset of the term: a lower payment over a new 30-year term can mean more total interest.
Questions to answer first
How much do you need, and for how long? What does it cost to close each option? How long will you hold the property?
Francisco's home page comparison walks through both structures, and the calculators and compare page help with the math.
Frequently asked questions
Is a HELOC better than a cash-out refinance?
It depends on your current rate, the amount needed, costs and timeline. Compare the combined cost against the replacement cost.
What is a blended rate?
The balance-weighted average of the rates on two loans. It's useful for comparison but isn't an APR.
Can I get a HELOC on a rental property?
Some lenders offer them on investment properties under different guidelines. Availability varies.
Sources
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What to clean up in the three months before applying with bank statements instead of tax returns: deposits, accounts, transfers and letters.
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How lenders calculate front-end and back-end DTI, which debts count, and a worked example you can redo with your own numbers.