Blended Rate Calculation Tool
Understanding the Blended Rate Calculation Formula
The blended rate is a weighted average interest rate representing the aggregate cost of funding across multiple debt instruments. Unlike a simple average, which treats all rates equally, the blended rate formula weights each interest rate by the outstanding principal balance of its corresponding loan.
This calculation is critical when determining the financial efficiency of combining two distinct debts (such as a primary mortgage and a HELOC or second mortgage) versus refinancing the entire amount into a single new loan.
The Mathematical Formula
To calculate the effective blended rate, use the following logic:
- P1: Principal balance of the first loan.
- R1: Interest rate of the first loan.
- P2: Principal balance of the second loan.
- R2: Interest rate of the second loan.
Example Calculation
Consider a scenario where a homeowner holds a primary mortgage of $300,000 at 3.0% and needs to access equity. They take out a Home Equity Loan of $50,000 at 9.0%.
A simple average of the rates would be (3% + 9%) / 2 = 6%. However, this is incorrect because the bulk of the debt is at the lower rate. The blended rate formula provides the true cost:
Numerator: (300,000 × 0.03) + (50,000 × 0.09) = 9,000 + 4,500 = 13,500 (Total Annual Interest)
Denominator: 300,000 + 50,000 = 350,000 (Total Principal)
Result: 13,500 / 350,000 = 3.86%
If the current market refinance rate is 6.5%, the blended rate of 3.86% indicates that keeping the two separate loans is significantly cheaper than consolidating them.