Keep your first mortgage
Three ways to use your equity without giving up your rate
If your first mortgage is in the 2s or 3s, refinancing it to get cash is usually the wrong move. These three leave it alone. They differ in one thing: how much you pay each month.
Most people asking about equity right now have the same problem. They have a first mortgage at a rate they will never see again, and they need money. A cash-out refinance would solve the money problem by destroying the rate.
So leave the first mortgage alone. These three all sit behind it.
Three ways to use your equity
All three sit behind your first mortgage, so you keep the rate you have. They differ in one thing: how much you pay each month. Put your numbers in. Nothing is sent and no credit is pulled.
Rates and assumptions (edit any of these)
These rates are assumptions so you can see the shape of each option. They are not an offer and not a quote. Your real terms depend on your file.
Estimates from what you typed, not an offer of credit. A home equity agreement is not a loan. Send me your real numbers and I will price all three against each other and tell you which one I would actually do.
They line up on one question: what can you pay each month?
That is really the whole decision. Everything else follows from it.
- A full payment gets you a HELOC. It is the only one of the three where the balance goes down. Highest payment, lowest total cost, and the most ordinary of the three.
- A small payment gets you the flexible-payment line. You pick a payment between 1% and 5% of the balance a year. The payment is low because it does not cover the interest.
- No payment at all gets you a home equity agreement. Nothing is due monthly. You settle up when you sell or buy it out.
The less you pay now, the more it costs later. That is not a trick, it is arithmetic.
When a HELOC is the answer
Your credit is reasonable, your income supports the payment, and you want the cheapest total cost. You are also fine with the balance being a real debt you are retiring.
This is the right answer more often than the other two. It is boring and it works.
When the flexible-payment line is the answer
Cash flow is the constraint. You need the money and you cannot add a full second payment to your month.
You should understand what you are buying. The balance grows. The loan runs 40 years with a five-year draw, and it does not recast into a normal payment afterward — the small payment continues and the balance keeps climbing until it is paid off or the house sells. There is a balloon at the end.
That is a reasonable trade if you have a plan: you are selling in a few years, your income is about to change, or you are bridging to something. It is a poor trade if the plan is to ignore it.
The minimum is $75,000. I have to run your exact line size through the lender's quote tool, because it depends on your age, the rate and your first mortgage balance. I cannot ballpark that one honestly.
When a home equity agreement is the answer
You cannot support any new payment, or your income does not document well, or your credit is too thin for the other two. Credit can go down to about 500 and there is no income or employment check.
Two things decide whether it is a good deal:
Time is the price. Leaving in year one is very expensive. Holding ten years is not. That is the opposite of how people assume expensive money works, and it means a short horizon is the disqualifier.
The downside protection is real. If your home loses value, what you owe back falls with it. No loan does that.
What I will actually do
Send me your numbers and I will price all three and tell you which one I would do in your position. If the answer is that you should leave your equity alone, I will say that too.
Questions people ask
Do any of these touch my first mortgage?
No. All three sit behind it. You keep the rate you have. If your first is at 3% and you refinance the whole thing to pull cash out, you give that up on the entire balance — which is usually far more expensive than the cash is worth.
Which one has the lowest monthly payment?
The home equity agreement, because there is no monthly payment at all. Next is the flexible-payment line, where you choose a payment as low as 1% of the balance a year. A HELOC has the highest payment because it is the only one that actually pays the balance down.
What is the catch on the flexible-payment line?
The small payment does not cover the interest, so the difference gets added to what you owe. Your balance grows every month and the loan ends in a balloon. That can be the right trade if cash flow is the problem and you plan to sell or refinance, but you have to go in knowing the balance goes up, not down.
What is the catch on a home equity agreement?
You give up a share of what the home is worth later, and the share is of the full value, not just the gain. Leaving early is the expensive case. You pay the lower of that share or the investment grown at a capped rate, so a longer hold is cheaper, not dearer. If the home loses value, you owe less.
Is there a credit check to use the calculator?
No. Nothing is sent anywhere and nothing is pulled. It runs in your browser.
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