The Blended Rate: How to Decide Between a Cash-Out Refinance and a HELOC When You Have a Low Mortgage Rate

The Math Problem Hiding Behind "Which Option Is Better"

A lot of homeowners ask me which is better, a cash-out refinance or a HELOC, and I always come back with the same reframe: that's rarely the real question. The real question is what happens to your blended rate once the new money gets added, and whether that number beats what a full refinance would cost you today.

What trips people up is that a cash-out refinance doesn't just add a new rate on the cash you're pulling out. It replaces your entire existing balance, principal you've already been paying down for years, at whatever the current rate happens to be. Freddie Mac's most recent weekly Primary Mortgage Market Survey put the 30-year fixed average at 6.69%, up slightly from 6.66% the week before. If your existing rate sits well below that, a cash-out refinance erases your old rate on money that was never part of the problem, rather than blending it with anything.

A second lien works differently. Whether it's a home equity line of credit or a home equity loan, it only prices the new balance you're borrowing, and your first mortgage keeps its original rate, untouched. What you actually pay, in a blended sense, is a weighted average of the old rate on the old balance and the new rate on the new balance, worth running through the actual formula instead of trusting a gut feeling.

Running the Blended-Rate Formula on Three Real Balances

The formula itself is simple: Blended Rate = (Balance1 x Rate1 + Balance2 x Rate2) divided by the sum of both balances. What changes the outcome is the size of the second piece relative to the first, so here are three scenarios at different equity levels.

Say you're carrying a $600,000 first mortgage at a locked-in low rate and only need to borrow $30,000. Even if that second piece prices near today's Bank Prime Loan rate, which the Federal Reserve's H.15 release most recently put at 6.75%, plus a lender-set margin, the blended rate barely moves, since the math is dominated by the $600,000 at your original rate. If your numbers look like this, a HELOC makes a lot of sense. You're not going to rework an entire six-figure first mortgage to access a small second draw.

Now say your first mortgage is $350,000 and you need $75,000, maybe to consolidate debt or finish a larger renovation. The second piece is roughly 18% of the combined balance, so the blended rate climbs meaningfully above your original rate, though it typically still lands below today's refinance rate on the full amount. If you're in this range, this is the zone where the decision actually gets close.

Push it further: a $250,000 first mortgage and a $150,000 need, close to 38% of the total. The blended rate has moved a long way toward the second-lien rate here, and a cash-out refinance at today's average can end up cheaper on the total balance, especially once a HELOC's typically variable rate drifts further if prime moves before the draw is paid down. If you're borrowing at this level relative to your balance, this is where I'd ask you to compare both options side by side.

Those three balances point to three different answers, which is exactly why "which is better" is the wrong first question. The right first question is where your own numbers land on this scale.

Why Closing Costs Move the Crossover Point Further Than People Expect

The blended-rate math above is only half the picture. Freddie Mac notes that refinance closing costs average roughly $5,000 and typically run 3% to 6% of the loan principal, covering the appraisal, underwriting, origination, and other fees. On a $400,000 refinance, that's potentially $12,000 to $24,000 added to what you're financing.

A second lien usually carries little or no closing cost by comparison. That asymmetry means the true crossover point sits meaningfully lower than the raw rate comparison alone would suggest. In the mid-size scenario above, where the blended rate and the refinance rate were already close, folding in closing costs can be enough to tip the decision back toward keeping your first mortgage intact.

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If you compare 6.69% against a second-lien rate in the sevens, you might assume the refinance wins. That ignores that the smaller number applies to the entire loan while the larger one only applies to new money, and that one path carries a five-figure entry fee the other typically doesn't. Run both totals alongside both rates before you decide.

The Deductibility Fork That Changes the After-Tax Comparison

What the money is for has nothing to do with rates, and it can still flip your decision. Per IRS Publication 936, mortgage interest is only deductible to the extent proceeds were used to buy, build, or substantially improve the home securing the loan, whether the money comes through a refinance or a second lien. Remodel a kitchen, and that portion typically qualifies, up to the $750,000 acquisition-debt limit for most borrowers. Pay off credit cards or fund something unrelated to the home, and it generally doesn't, no matter which structure you use. If you're consolidating debt, you'll want to run your comparison on an after-tax basis.

When Keeping the First Mortgage Untouched Is the Better Call

The Consumer Financial Protection Bureau frames this plainly: home equity borrowing can let you tap equity without having to replace an existing low interest rate mortgage with a higher interest rate cash-out refinance. That's the core tension behind this decision, and it isn't a fringe scenario. The Federal Reserve Bank of New York's most recent household debt data shows outstanding HELOC balances climbing to $446 billion in the first quarter, the sixteenth straight quarterly increase.

Money already spent versus money not yet spent is the sharper diagnostic here, sharper than a generic "it depends." If your money is already spent, say your contractors are paid and the work is underway, the bills are coming regardless, so a fixed-rate second lien or cash-out refinance usually wins because you're locking in a rate on a balance you were committing to amortize anyway. If your money isn't yet spent, say you're holding a rainy day reserve, a HELOC usually wins because you only pay interest on what you draw.

The Variable That Erases the Blended-Rate Advantage Entirely

There's one more factor worth naming: risk position. Second mortgages are repaid after the first mortgage in a foreclosure or sale, per the Consumer Financial Protection Bureau, which is exactly why they typically carry higher rates than first-lien debt. A large enough second-lien balance, particularly one with a variable rate that can climb over a long draw period, can erode a blended-rate advantage that looked solid on day one.

That's a reason to size a second lien honestly rather than avoid one. Run the four-variable check every time: how much you plan to borrow, what the money is for, what you owe on the first mortgage, and what other debt you carry on top of it. If you're asking for $40,000 but not mentioning $30,000 in credit card debt, you're not asking the full question.

What you're trying to limit is payment shock, the month-over-month jump in what you owe. Run your balances through the blended-rate formula, add in the closing-cost gap, check the deductibility fork against what the money is for, and the option that checks all three of those boxes is usually the one that fits.

You can run that math on your own with a calculator and your last statement, but the numbers change the moment your actual rate, balance, or credit profile enter the picture. A loan officer at AmeriSave can price both paths against your specific first-mortgage balance and tell you where your own crossover point sits, instead of the general ranges walked through here.