Since 2020, millions of homeowners have locked in historically low mortgage interest rates. Industry estimates indicate that a large majority of borrowers with mortgages now have rates below 4%, making today’s higher-rate environment a challenge for anyone considering a traditional cash-out refinance.
At the same time, homeowners are sitting on record levels of home equity nationwide. Rather than replacing a low-rate first mortgage with a new loan in the mid-6% range or higher, many homeowners are choosing to leave their first mortgage in place and access equity through a second lien.
Why Not Refinance?
For many homeowners, refinancing the first mortgage simply doesn’t make financial sense.
Replacing a 2.75% or 3.25% mortgage with one above 6% could significantly increase the monthly payment—even if the goal is simply to access equity, even if it eliminates the old loans mortgage insurance.
Instead, many borrowers are choosing to keep their existing first trust deed and tap equity using:
- Home Equity Line of Credit (HELOC)
- Home Equity Loan (Second Trust Deed)
- Third Trust Deed (available through select lenders)
Option One: Home Equity Line of Credit (HELOC)
A HELOC is a revolving line of credit secured by your home’s equity.
Typical features include:
- Variable interest rate (some lenders offer fixed-rate options)
- Interest is charged only on the amount borrowed, so you pay as you go
- Most payments are interest-only during the draw period
- Typical draw period for the first 3 to 5 years
- Repayment period generally ranges from 15 to 30 years, after the draw period expires
- Many lenders charge an annual maintenance fee
- Funds can be borrowed, repaid, and borrowed again during the draw period
- These can be frozen at anytime from the lender, if the market values start to dip, like 2008
A HELOC offers flexibility for homeowners who expect to borrow funds over time rather than all at once.
Option Two: Home Equity Loan (Second Trust Deed)
A Home Equity Loan, often called a Second Trust Deed, functions much like a traditional mortgage.
Benefits include:
- Fixed interest rate
- Fixed monthly payment
- Fixed loan term
- Payment does not fluctuate if interest rates rise
- Monthly payment remains the same throughout the loan term
- Once it is funded, money is yours, and lender cannot cancel or freeze like they did in 2008
Unlike a HELOC, payments generally do not decrease simply because you pay the balance down early. For homeowners seeking predictable payments, a fixed-rate second mortgage is often considered the more conservative option.
Option Three: Third Trust Deed
Although less common, third trust deeds are available through select lending programs.
This option allows homeowners to:
- Keep the existing first mortgage
- Keep the existing second mortgage or HELOC
- Add a third mortgage to access additional equity
Because three mortgages increase overall lending risk, underwriting is generally more conservative and program availability is more limited.
Traditional Mortgage Qualification
Most home equity loans qualify using standard mortgage underwriting.
Lenders generally review:
- Current first mortgage payment
- New second or third mortgage payment
- All monthly obligations shown on the credit report
- Stable income
- Credit history
Typical guidelines include:
- 680+ FICO Score for the strongest pricing
- Maximum debt-to-income ratios of approximately 45% to 50%
- Up to 90% Combined Loan-to-Value (CLTV) in many programs
- Little or no additional asset requirement beyond funds needed to close
Borrowers with exceptional equity may have additional flexibility depending on the lender.
Enhanced Non-QM Options for Self-Employed Borrowers
Self-employed homeowners who do not qualify using traditional tax returns may have additional options through Non-QM financing.
One popular program uses 12 months of business or personal bank statements to calculate cash flow instead of taxable income to obtain a fixed 2nd TD.
Typical guidelines include:
- 12 months documented bank statement cash flow
- Current mortgage payment plus new second mortgage payment included in debt calculation
- Credit report obligations included
- Generally 680+ FICO
- Three to six months of reserve assets
- Maximum combined loan-to-value around 80%
These programs can be an excellent solution for business owners whose tax returns do not fully reflect their actual cash flow.
Talk To Your CPA
Junior liens, 2nd TD, helocs, or 3rd TD’s all potentially can impact your taxes or not. We suggest you get with your CPA or tax preparer to discuss how these work for you and if they are tax-deductible.
Final Thoughts
Today’s interest rate environment has changed the way homeowners access equity. Rather than refinancing a valuable low-rate first mortgage, many borrowers are preserving that financing while adding a HELOC, fixed-rate second trust deed, or even a third trust deed to meet their financial goals.
As interest rates eventually moderate, homeowners may have the opportunity to evaluate whether consolidating the first and second mortgages into one new loan makes financial sense. Until then, leaving the existing first mortgage in place while strategically accessing equity has become one of the most practical financing strategies available in the Temecula Valley.
