Ask the Expert: Should I Refinance to Pull Cash Out of My Home?

Question:
My first mortgage has a 3.1 percent interest rate. Now I need to pull some cash out of my home’s equity. Should I refinance everything into a new mortgage, or is there a better option?

Answer:
Hang on to that 3.1 percent rate like it is a family heirloom — because right now, it is.

If you refinance your entire mortgage just to pull out cash, you may be giving up a rate you will not see again anytime soon. With today’s mortgage rates much higher than 3.1 percent, a cash-out refinance could raise the interest rate on your whole loan balance, not just the money you need to borrow. That can turn a simple need for cash into a much larger monthly payment.

For many homeowners in this situation, a Home Equity Line of Credit, or HELOC, may be the better option.

A HELOC is a separate loan secured by the equity in your home. It leaves your original mortgage untouched. You borrow only what you need, when you need it, and you pay interest only on the amount you actually use.

That flexibility can be useful if you are paying for home repairs, medical expenses, tuition, debt consolidation, or another cost that may come in stages.

There is one important caution: most HELOCs have variable interest rates. That means the rate can move up or down, often with changes in the prime rate. If rates rise, your payment can rise too — sometimes quickly. Before signing, ask your lender to show you what the payment would look like if the rate increased.

A home equity loan is another option. It also leaves your first mortgage alone, but instead of a line of credit, you receive one lump sum. The rate is usually fixed, making payments more predictable. This can be a good fit if you know exactly how much money you need and want a set repayment schedule.

Both HELOCs and home equity loans often have lower closing costs than a full refinance, though terms vary by lender.

The main point is simple: do not give up a low first-mortgage rate unless there is a very strong reason to do so. A HELOC or home equity loan may let you access your equity without replacing something valuable — that 3.1 percent mortgage.