Conforming Cash-Out vs. Second Lien: Six Calculations I Won’t Skip Again

When my kitchen remodel estimate landed at $78,000, I had two options: refinance my entire first mortgage with a conforming cash-out loan or leave the low-rate first alone and open a second lien. The obsession with “never touch a low rate” is popular on social media, but real math told a different story. Here are the six calculations that guided my decision—and the lessons any homeowner can apply.

1. Blended rate comparison

I started by writing down the current balance and rate on my first mortgage ($452,000 at 3.125%) and the quotes for potential second liens (9.5% HELOC, 10.25% home equity loan). Then I calculated the blended rate: ((First balance x first rate) + (Second balance x second rate)) / Combined balance. Keeping the first mortgage and adding a HELOC produced an effective rate of 4.62%. The conforming cash-out refinance quote landed at 6.125% for the entire balance. On the surface, keeping the first mortgage looked cheaper, but blended rates only tell part of the story.

2. Payment volatility

HELOC payments change during the draw period as prime rate moves. My budget can handle fluctuations, but I wanted to know worst-case scenarios. I modeled payments at prime plus 1.5%, 2%, and 3% using a spreadsheet that mirrored HELOC amortization rules. In contrast, the conforming cash-out payment would be fixed for 30 years. Stability mattered because I run a freelance business with uneven cash flow. Each time I tested a rate hike, the HELOC payment jumped more than $200. That volatility nudged me toward the refinance.

3. Total interest over renovation timeline

I mapped out the renovation schedule (nine months) and the payoff plan (extra principal payments once the project finished). Using amortization tables, I calculated interest paid under three scenarios: full refinance, HELOC paid off in seven years, and a hybrid approach where I refinanced part of the balance and used savings for the rest. Surprisingly, the refinance cost only $3,400 more in interest over the first five years than the HELOC plan, largely because conforming rates remain far lower than unsecured lending options.

4. Loan-level price adjustments and MI

Cash-out loans trigger additional LLPAs based on credit score and loan-to-value ratio. My middle credit score was 728 and the new loan would be at 76% LTV. I used the FHFA LLPA matrix to estimate a 1.875% hit, which equated to roughly $10,000 in points. Rolling that into the loan increased the payment, but it still kept me below the blended HELOC scenario once I factored in volatility. I also confirmed that no mortgage insurance would be required because the new LTV stayed under 80%.

5. Break-even on closing costs

The refinance carried $6,800 in closing costs versus roughly $1,200 for the HELOC. To calculate break-even, I divided the cost difference by the monthly payment savings compared with the blended HELOC plan. Because the refinance payment was $168 lower than the combined first-plus-HELOC payment (after accounting for volatility), the break-even was just over 40 months. I plan to stay in the home for at least seven years, so the math supported the refinance.

6. Future flexibility

Lastly, I considered what happens in three years if rates drop. A cash-out refinance resets the entire mortgage, but it also positions me for a streamlined rate-and-term refinance later without juggling two liens. Keeping a HELOC would require subordinating the second lien during any future refinance—a process that can delay closings and occasionally get denied. Simplicity has value. I imagined explaining my file to a future underwriter and realized that a single conforming loan would make that conversation easier.

The decision

I chose the conforming cash-out refinance. I locked for 45 days, coordinated the draw schedule with my contractor, and used part of the cash to build a contingency fund for overruns. The extra closing costs hurt for a moment, but I sleep better knowing my payment is fixed and my mortgage structure is clean.

Tips if you’re facing the same choice

• Collect real quotes, not assumptions. HELOC ads rarely show the fully indexed rate. Ask for today’s rate plus the margin.
• Model multiple rate environments. Use spreadsheets or online calculators to preview how payments react to Prime changes.
• Review LLPAs with your loan officer. Credit score, occupancy, and LTV drive pricing. Ask for the exact percentage being charged.
• Plan your exit. Whether you choose a second lien or a refinance, write down how and when you’ll pay it down.
• Document everything for the underwriter. Cash-out loans require paper trails for renovations if you want to prove the funds improved the property.

The internet loves absolutes, but mortgages demand nuance. Run these six calculations with your own numbers, involve a trustworthy loan officer, and choose the structure that keeps both your project and your long-term finances on track.