01
Step one: list each balance and rate
Start by writing every debt or component on its own line, with the current balance and the annual rate. Use the amount still owed, not the original amount borrowed, because the balance decides how much influence each rate has. Example: a first mortgage of 240,000 at 4 percent, a second loan of 40,000 at 7 percent and a line of credit of 20,000 at 9 percent. Keep the rates in the same period, such as annual, so the comparison is consistent. Confirm whether each rate is fixed or variable, because variable rates can change the result later.
02
Step two: weight and add
Multiply each balance by its rate to see the yearly interest it produces. In the example, 240,000 times 4 percent gives 9,600; 40,000 times 7 percent gives 2,800; and 20,000 times 9 percent gives 1,800. Add these to reach 14,200 of interest per year. Then add the balances to get 300,000 in total. This step is where a simple average fails: averaging 4, 7 and 9 would give about 6.67 percent, which overstates the cost because the cheapest loan is also the largest one.
03
Step three: divide and test the result
Divide total yearly interest by total balance: 14,200 divided by 300,000 equals about 4.73 percent. That is the blended rate. Next, compare it with any single replacement offer, remembering to include fees, term length and whether the new rate is fixed. A lower blended figure from a refinance only helps if the extra costs do not erase the saving. Recalculate whenever balances change, since paying down the expensive loan first moves the blend downward faster than paying down the cheap one. This is a general method, not personal financial advice.