Your Blended Rate: What All Your Debts Cost Together

A household often thinks about its borrowing in separate pieces: a mortgage at one rate, a car loan at another, a credit card at a third. Is there one number that describes what all of it costs? There is, and it is called a blended rate. It is a useful way to see where interest is going, but it can also mislead if it is used on its own to decide whether to refinance.

Key takeaways

• A blended rate is the weighted average of every balance and its rate, which shows what all of a household's debt costs together.
• In a hypothetical household, a card balance that is about a tenth of its debt produces about a third of its yearly interest.
• A blended rate is a summary and not an offer, since a new loan is priced on its own terms.
• Moving card debt into a refinanced mortgage applies the new rate to the whole mortgage balance, which can raise total interest even while the monthly payment falls.
• Turning unsecured debt into debt secured by the home changes what is at risk if payments cannot be made.

How a blended rate works

A blended rate is a weighted average. Multiply each balance by its annual rate, add the results to get a year of interest, and divide by the total owed.

Consider a hypothetical household with a $300,000 mortgage at 4 percent and a $30,000 credit card balance at 21 percent.

• Mortgage interest for a year is about $12,000.
• Card interest for a year is about $6,300.
• Together that is $18,300 on $330,000 of debt, or a blended rate of about 5.5 percent.

Two things stand out. The blended rate looks modest because most of the debt is the low-rate mortgage. But the card is only about 9 percent of the balance and produces about 34 percent of the yearly interest. The average hides how unevenly the cost is spread.

What the number can and cannot tell you

A blended rate shows where interest dollars go and which balances are most expensive per dollar owed. It is a snapshot of the present.

It is not a rate anyone can obtain. No lender offers 5.5 percent because a household's existing loans average out to it. A new loan is priced on its own rate, term, fees, credit profile and the value of the home. Comparing the blended rate to a quoted rate is a reasonable first look, but it cannot settle the question.

Moving card debt into a mortgage

One way some households try to lower the blended rate is a cash-out refinance. The Consumer Financial Protection Bureau describes it as replacing an existing mortgage with a bigger one and taking the difference in cash. It adds that closing costs often apply and advises considering the interest rate carefully, especially if it is higher than the rate on the current mortgage.

That last point is the heart of the matter. The new rate applies to the whole new loan, not only to the cash taken out.

Suppose the household above refinances into a single $330,000 loan at a hypothetical 6.5 percent over 30 years and uses the cash to clear the card. The payment is about $2,086 a month. If it kept everything as is, it would pay about $1,584 on the mortgage plus about $812 to clear the card in five years, or about $2,395. The refinance payment is roughly $309 lower.

Now look five years out, ignoring closing costs.

• Keeping the loans: about $261,300 still owed, with the card gone and about $75,000 of total interest paid on both loans.
• Refinancing: about $308,900 still owed, with about $104,000 of interest paid.

The lower payment comes partly from stretching the debt over a longer period and partly from applying a higher rate to the original $300,000. Whether that trade works depends on what the freed-up cash is used for, how long the household stays in the home and what the refinance costs. In a different rate environment the comparison could look very different.

Other routes people explore

Some households leave the first mortgage alone and look at a second loan secured by the home instead. In the same example, a $30,000 home equity loan at a hypothetical 8 percent over five years would cost about $608 a month and about $6,500 in interest, compared with about $812 and $18,700 at 21 percent.

The Consumer Financial Protection Bureau cautions that if you do not pay back a home equity loan, the lender could foreclose. It also notes that upfront fees and costs may apply, and that the equity used for consolidation may not be available later for emergencies or home repairs. Moving a card balance onto the house means a missed payment can now put the home at risk, which is not the case for an unsecured card.

Other options include paying the card down from monthly cash flow, a promotional balance transfer (the Bureau notes that these rates last for a limited time and usually carry a fee), or talking to a nonprofit credit counselor. The Bureau suggests speaking with a qualified credit counselor before consolidating debts.

Questions to ask first

1. What is my blended rate, and which balance contributes most of the interest?
2. If I refinance, what rate would apply to the whole balance, and how does it compare with my current mortgage rate?
3. How much would closing costs add, and how long would it take to recover them?
4. How many years would the new loan run, compared with the debts it replaces?
5. What changed the card balance in the first place, and what would keep it from building again?
6. How comfortable am I with that debt being secured by my home?

A blended rate is a good place to start the conversation. The answers to these questions decide what it means.

Common questions

How do I calculate a blended interest rate on my debts?

Multiply each balance by its annual rate, add those amounts to get yearly interest, then divide by the total of all balances. For example, $300,000 at 4 percent and $30,000 at 21 percent gives $18,300 of interest on $330,000, or about 5.5 percent.

Does a low blended rate mean I can get a loan at that rate?

No. A blended rate only describes what you pay now across several loans. A new loan is priced separately, based on its own rate, term, costs and your credit and home equity.

Is using a home loan to pay off credit cards risky?

It can be. The Consumer Financial Protection Bureau notes that if you do not pay back a home equity loan the lender could foreclose, and that the equity used may not be available later for emergencies or repairs. It suggests talking to a qualified credit counselor before consolidating.

NIFE provides general financial education. LendsightAI and Debt Done Date are separate for-profit partners; optional services may have a fee.