So you have a situation in which you need to access cash. You have a first mortgage at 3%, lots of equity in your home and you want to cash out refinance in order to do a new improvement. What’s the best way to access that money?..

The reality of it is you pretty much have three choices. Wait, do a second mortgage, or do a cash-out refinance. Those are the only three choices.  You don’t want to give up a 3% mortgage on a cash-out refinance, but you also don’t like the idea of having an adjustable-rate loan either. Well, you have to be comfortable with the temporary prospect of being uncomfortable. More specifically here’s what this means… Your first option is to just wait and not do anything and hope long-term interest rates come down which they will, but no one knows when that’s going to be. That could be another year out or longer, it also could be sooner. Another option is to take out a home equity line of credit. These are pricey averaging around 10% with most, but not all banks.  This loan choice is essentially like a giant credit card tied to your home. You only pay interest on the current loan balance.
The problem with this loan is it is a variable rate that moves in alignment with the prime rate. If the prime rate continues to go up, the payment on this type of loan rises if you carry a balance. Ten percent interest is not cheap money by any stretch of the means. Another alternative to cash-out refinance is to take out a new first mortgage, in the mid-six percent range. This means giving up your 3% loan knowing however, that the payment is fixed, and if the payments on this might actually end up being almost the same as a home equity line of credit, without having the adjustable-rate payment component that a home equity line of credit does.

At the end of the day, it may boil down to whatever helps you sleep at night, but more specifically things can get sometimes a little bit murky. If you have the financial ability to pay off the home equity line of credit very quickly within 12 months, so you have zero balance, that might not be a bad thing to consider however, if you don’t have the economic means to pay off the home, equity line of credit balance, within 12 months, doing a new first mortgage might be a better solution altogether, knowing that you could always refinance ith long-term interest rates, lowering in the future. Know that whatever direction you decide to go long-term interest rates are poised to come down allowing you to potentially refinance the loan in the future lower your interest rate and lower your monthly payment as a result.

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