If you bought or refinanced between 2020 and 2022, you are probably sitting on a mortgage rate you will never see again. That rate is worth protecting, and it changes how you should think about using your equity.
The trap
A cash-out refinance replaces your whole mortgage with a new, larger one at today's rate. If you owe $260,000 at 3.1% and refinance to pull out $60,000, all $320,000 now carries the new rate. On a typical loan that is several hundred dollars a month more — forever — to access money you already own.
The alternative: a second lien
A home equity loan or a HELOC sits behind your existing mortgage instead of replacing it. Your first mortgage, and its rate, do not change at all. You pay today's rate only on the new, smaller amount.
When a refinance still makes sense
If your current rate is above today's, or you want to consolidate everything into one payment and are prepared to reset your term, a cash-out refinance can be the right call. The lender should run both scenarios for you on the call — it takes about ten minutes.
What to ask
- “What would my payment be with a second lien versus a full refinance?”
- “Is the second-lien rate fixed or variable?”
- “What are the closing costs on each?”