Assessing Your Blended Interest Rate: A Holiday Financial Check-Up
As the holiday season approaches, it’s the perfect time to evaluate your financial health. One way to do this is by calculating your blended interest rate—the average interest rate across all your debts. Understanding this rate helps you see the true cost of your borrowing and identify areas to save money, especially if you’re carrying high-interest debt like credit cards or personal loans.
What Is a Blended Interest Rate?
Your blended interest rate is the weighted average rate you’re paying on all your debts, including your mortgage, car loan, credit cards, and personal loans. While a low mortgage rate might seem reassuring, adding high-interest debt can significantly increase your overall borrowing costs.
Here’s an example calculation:
$250,000 mortgage at 4.5% = $11,250 annual interest
$15,000 car loan at 6% = $900 annual interest
$50,000 credit card debt at 22% = $11,000 annual interest
$35,000 personal loan at 11% = $3,850 annual interest
Total Debt: $250,000 + $15,000 + $50,000 + $35,000 = $350,000
Total Annual Interest: $11,250 + $900 + $11,000 + $3,850 = $27,000
Blended Interest Rate = $27,000 ÷ $350,000 = 7.7%
What Happens with a Cash-Out Refinance?
If you’re carrying significant high-interest debt, a cash-out refinance can consolidate your debts into a single fixed monthly payment at a potentially lower interest rate. Let’s look at the numbers for refinancing all your debt into a 30-year fixed-rate mortgage at 7%:
New Mortgage Balance:
Current mortgage: $250,000
Credit cards: $50,000
Personal loan: $35,000
Total: $335,000
New Monthly Payment at 7% (30-Year Fixed):
Using a standard mortgage payment formula, the monthly payment for $335,000 at 7% is approximately $2,227.Monthly Payments Before Refinancing:
Mortgage: $1,267 (at 4.5%)
Car Loan: $290
Credit Card: $1,500
Personal Loan: $725
Total Monthly Payments: $3,782
Monthly Payments After Refinancing:
New Mortgage Payment: $2,227
Car Loan: $290 (unchanged, as it’s not included in the refinance)
Total Monthly Payments After Refinance: $2,517
Monthly Savings: $3,782 - $2,517 = $1,265
While the savings are significant, they reflect a real shift in how your debts are structured: you’re replacing higher-interest, shorter-term loans (like credit cards and personal loans) with a longer-term mortgage.
Key Benefits of a Cash-Out Refinance
Lower Blended Interest Rate: By consolidating your credit cards and personal loan into the mortgage, your blended interest rate decreases from 7.7% to 7% (the rate on the new loan).
Simplified Payments: Managing one fixed-rate mortgage payment is easier than juggling multiple debts with different due dates and rates.
Improved Cash Flow: Lower monthly payments free up money for savings, holiday expenses, or paying off the remaining car loan faster.
Important Considerations
Before committing to a cash-out refinance, consider the following:
Higher Mortgage Rate: Your new mortgage rate of 7% is higher than your existing 4.5% rate, so you’re trading lower interest on the mortgage for a reduction in high-interest debts.
Longer Loan Term: Refinancing into a 30-year mortgage resets your loan term, which means you’ll pay more interest over the life of the loan unless you prepay.
Closing Costs: A cash-out refinance typically includes closing costs of 2-5% of the loan amount, so ensure the savings justify the upfront costs.
When Does This Make Sense?
A cash-out refinance works well if:
You have significant high-interest debt, like credit cards and personal loans.
You plan to stay in your home long enough to recoup the closing costs.
You want to improve cash flow and simplify your finances.
Final Thoughts
Understanding your blended interest rate is a powerful way to evaluate your finances. If high-interest debt is straining your budget, a cash-out refinance can lower your overall borrowing costs, simplify your payments, and free up cash flow to meet your goals.
If you’d like to explore whether a cash-out refinance is the right solution for you, let’s connect. Together, we can develop a plan to improve your financial health and help you start the new year on solid footing.