Here’s a strange mortgage question: Why are borrowers trading in cheap mortgages for more expensive financing?
If you had a mortgage in the 2% range — or 3% or 4% — would you trade it for a 6% rate? It doesn’t seem like an attractive exchange, and most homeowners with low-rate financing have been holding onto their loans with great ferocity.
The catch is that many owners also want to get cash from their properties. This is possible for millions of homeowners because of the significant price increases seen in recent years. Home values have grown more than 47% since 2021, according to the Harvard Joint Center for Housing Studies.
In basic terms, there are two ways for homeowners to access their built-up equity: they can sell or refinance.
Selling to Access Equity
Selling is not the most likely option for most homeowners — the majority are holding on to their low-rate mortgages and staying put.
Existing home sales have remained suppressed in recent years, and ICE Mortgage Technology’s ICE Mortgage Monitor has tracked the gradual erosion of low-rate mortgages as homeowners slowly move on: “There are 5.8 million fewer mortgages with rates below 5% than there were two years ago, and 4.8 million fewer with rates below 4%, as borrowers with lower rates slowly sell their homes or, to a smaller degree, refinance to withdraw equity.”
That said, some owners do want or need to sell — people move for many reasons, including a new job, proximity to family, divorce, or a desire to relocate to an area with a lower cost of living.
Owners who do decide to sell are likely to find a receptive market. According to the National Association of Realtors (NAR), single-family existing-home sales prices rose in the vast majority of metro areas tracked — with the typical home seeing roughly a 4.9% price increase year over year.
Refinancing to Access Equity
While selling is one way to access home equity — and potentially a six-figure check at closing — moving isn’t for everyone. Selling means giving up today’s low-rate mortgage and, in many cases, financing a replacement property at a higher rate.
For those with low-rate first mortgages and significant equity, there are options to pull cash from a property while leaving the existing loan in place.
Simply replacing an existing mortgage with a new one at today’s rates doesn’t make much sense when current rates are higher than what most homeowners locked in a few years ago. A better option for many is to keep the current financing in place and add a second mortgage.
A second mortgage is exactly what it sounds like: the existing first mortgage stays in place with its original rate and terms, while an additional mortgage is layered on top to free up equity. The owner receives cash when the second loan closes.
The second mortgage will carry today’s market rate — but because that rate only applies to a portion of your total debt, the blended interest rate across both loans is often significantly lower than what you’d pay on entirely new financing. Keep in mind that second mortgages do come with their own closing costs and add to your monthly obligations, so it’s important to run the numbers carefully.
Another option that keeps the first loan intact is a home equity line of credit (HELOC).
A HELOC works similarly to a credit card: you have a revolving line of credit and can borrow and repay during a set draw period — typically 10 to 15 years. As you repay the balance, your available credit renews.
Once the draw period ends, a repayment phase begins — usually another 10 to 15 years — during which any remaining balance is repaid like a standard mortgage with fixed monthly payments. Some borrowers choose to pay off the balance before the repayment phase begins, or to refinance into a different loan if better terms become available. Note that most HELOCs carry variable interest rates, meaning your payments can fluctuate over time.
The key appeal of a HELOC is flexibility: the existing first mortgage stays in place with its original rate and terms, while homeowners can draw from the line of credit as little or as much as needed.
Want to explore how much equity you could access? See your home equity options with Refi.com — whether you’re considering a second mortgage or a HELOC, we can help you find the right fit.
