HELOC vs. Cash-Out Refinance: The Blended Rate Break-Even Formula

Imagine you bought a home a few years ago and locked in a historic 3.25% mortgage rate. Today, you want to tap $75,000 of your home equity to fund a kitchen remodel.

A mortgage broker calls and offers you a cash-out refinance at 6.50%. It sounds simple: replace your current loan with one new, larger loan, and walk away with a check.

But replacing a 3.25% mortgage on a $300,000 balance just to get $75,000 is almost always a massive financial mistake. The alternative is keeping your 3.25% first mortgage and taking out a Home Equity Line of Credit (HELOC) or a second mortgage. Even if the HELOC rate is a scary 8.50%, the blended rate of your combined loans will still be significantly cheaper than a 6.50% cash-out refinance.

Here is the exact mathematical formula to calculate your break-even point and make the right refinancing decision.

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The Core Concept: The Weighted Blended Rate

Lenders want you to focus on the interest rate of the new equity draw. They will point out that 8.50% on a HELOC is higher than 6.50% on a cash-out refinance.

However, they are ignoring the fact that a cash-out refinance replaces your entire mortgage. You are taking your low-interest debt and inflating it to today's rates.

To compare your options fairly, you must find your blended rate—the weighted average interest rate of your current mortgage combined with your new home equity loan.

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The Blended Rate Break-Even Formula

To find out whether a HELOC or a cash-out refinance is cheaper, use this blended rate formula:

Blended Mortgage Rate = (Balance₁ × Rate₁ + Balance₂ × Rate₂) ÷ (Balance₁ + Balance₂)

If the resulting Blended Mortgage Rate is lower than the rate offered on a cash-out refinance, you should choose the HELOC. If the cash-out refinance rate is lower than the blended rate, refinancing is the better deal.

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A Detailed Mathematical Comparison

Let's look at the numbers.

• Current Mortgage Balance: $300,000 at 3.25% interest rate.
• New Equity Needed: $75,000
• Option A: Cash-Out Refinance: Refinance the total $375,000 into a new loan at 6.50%.
• Option B: HELOC: Keep your 3.25% mortgage, and take out a $75,000 HELOC at 8.50%.

Let's calculate the blended rate for Option B:

Step 1: Calculate Weighted Interest Costs

• First Mortgage: $$300,000 \times 3.25% = 975,000$
• HELOC: $$75,000 \times 8.50% = 637,500$
• Combined Interest Weight: $975,000 + 637,500 = 1,612,500$

Step 2: Divide by Combined Balance

• Combined Balance: $$300,000 + $75,000 = $375,000$
• Blended Rate: $1,612,500 \div $375,000 =$ 4.30%

The Comparison

• Option A (Cash-Out Refi): 6.50% interest rate.
• Option B (Mortgage + HELOC): 4.30% blended interest rate.
• The Winner: Option B saves you 2.20% in interest on your combined $375,000 balance.

In dollars, a 4.30% blended rate costs $16,125 per year in interest, while a 6.50% refinance costs $24,375 per year. Choosing the HELOC over the refinance saves you $8,250 in the first year alone—even though the HELOC's individual rate is 2% higher!

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HELOC vs. Cash-Out Refinance Decision Matrix

Use this breakdown to quickly determine which option is mathematically superior based on your mortgage balance:

Use our Refinance Calculator to check current refinancing schedules and details:

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Factors Beyond the Math

While the blended rate math is the most critical starting point, keep these details in mind:

1. Variable vs. Fixed Rates: HELOCs usually carry variable interest rates tied to the prime rate. If rates rise, your HELOC rate will increase, driving up your blended rate. Home equity loans (second mortgages) offer fixed rates which prevent this risk.
2. Closing Costs: Refinancing a $375,000 mortgage carries closing costs calculated on the entire $375,000 balance (often 2-5%, or $7,500 - $18,750). HELOCs often have low or zero closing costs because the loan size is smaller.
3. Repayment Rules: HELOCs often feature an interest-only draw period (usually 10 years) followed by a 20-year principal repayment period. Refinances reset your amortization schedule to a new 30-year term, adding years of extra interest payments.

For a detailed analysis of home equity options, check out our guide on mortgage and HELOC blended rate dynamics or use our Blended Rate Mortgage Calculator to enter your own exact balances.

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Frequently Asked Questions

Is a HELOC cheaper than a cash-out refinance?

Often yes, if you have a large low-rate mortgage. Keeping a $300,000 balance at 3.25% and adding a $75,000 HELOC at 8.50% produces a 4.30% blended rate, well below a 6.50% cash-out refinance. That saves about $8,250 in interest during the first year alone.

How do I calculate the blended rate on a mortgage plus a HELOC?

Multiply each loan's balance by its rate, add the two figures, then divide by the combined balance. For a $300,000 mortgage at 3.25% and a $75,000 HELOC at 8.50%, the weighted costs total 1,612,500, divided by $375,000, giving a 4.30% blended rate.

When is a cash-out refinance actually the better choice?

When your primary mortgage is small and your new equity need is large. A $100,000 mortgage at 5.50% with a $200,000 draw produces a 7.50% blended rate, higher than a 6.50% refinance, so refinancing wins and saves about $3,000 per year in that scenario.

Why is a cash-out refinance on a low-rate mortgage a mistake?

Because it replaces your entire loan, inflating cheap 3.25% debt up to today's rates. Refinancing a $375,000 balance at 6.50% costs $24,375 a year versus $16,125 for the 4.30% blended option, and it resets your amortization to a fresh 30-year term with added closing costs.