Clearing $1800 a month I can't see much reason from what you suggested of needing the $30K windfall right now which is the only reason I can see for trading 2% for 3.5% even with a somewhat smaller payment for better cash flow (I'm admittedly a fan of cash flow but a 50% higher interest rate? Eek). I am a little surprised with those scores though, figured your interest rate would be lower if you weren't doing the cash out refi at least but I haven't watched the rates in the market in the past few months and with the Fed signalling 3 hikes next year mortgage market may already be moving. You're also going to have to write a check for closing or roll that into your mortgage potentially since you're doing cash out anyway that's another few K right now.
2% is basically free money, even historical inflation is around there and god knows we're well above that now. I'd be wrapping both arms around that 2% and if needed just dump the place before the balloon payment comes due or just write the check. My opinion anyway.
ETA: Even if you needed the 30K I'd just get a HELOC instead personally though the accounting might be a little weird with the balloon payment but have to figure someone would be willing to play ball.
