Key takeaways
- A cash-out refinance replaces your entire mortgage with a larger one and pays you the difference.
- A HELOC adds a separate line of credit and leaves your first mortgage untouched.
- If your current mortgage rate is well below today's rates, a HELOC usually costs less.
- A cash-out refinance can make sense when you'd also lower your first-mortgage rate or want one fixed payment.
Both options turn home equity into cash, but they work very differently. The deciding factor for many homeowners is simple: do you want to keep your existing mortgage rate?
How each option works
| Cash-out refinance | HELOC | |
|---|---|---|
| Structure | New first mortgage, larger than your current balance | Second lien; revolving line of credit |
| Rate | Usually fixed; applies to the entire balance | Usually variable; applies only to what you borrow |
| Closing costs | Typically 2%–5% of the new loan | Often low or none; may include an annual fee |
| Max borrowing | Conventional: up to 80% loan-to-value; VA: up to 90% or more with some lenders | Commonly up to 80%–90% combined loan-to-value |
| Payments | One fully amortizing payment | Often interest-only during the draw period, then principal and interest |
| Best for | Large one-time needs when you can also improve your rate | Ongoing or uncertain costs; keeping a low first-mortgage rate |
Example: a homeowner with a low existing rate
A homeowner owes $250,000 at 3.5% with 25 years left. Payment: about $1,252. They need $60,000 for a renovation.
- Cash-out refinance: new 30-year loan of about $316,000 (including $6,000 in costs) at 6.75%. New payment: about $2,050, an increase of roughly $800 a month.
- HELOC: keep the $1,252 first mortgage. Borrow $60,000 at 8.5% variable. Interest-only payment: about $425. If repaid over 20 years: about $521.
Even with a higher HELOC rate, the HELOC is far cheaper because the low 3.5% rate stays on the $250,000 first mortgage.
When a cash-out refinance wins
- Your current rate is close to or above today's rates.
- You want a fixed rate on all of your borrowing.
- You're consolidating high-interest debt and want one predictable payment.
- You plan to keep the loan long-term and want to avoid HELOC rate risk.
When a HELOC wins
- Your first-mortgage rate is low.
- You need money over time, like a phased renovation or tuition.
- You expect to repay the amount relatively quickly.
- You want to avoid large closing costs.
Risks of both
- Your home secures the debt. Missing payments can lead to foreclosure.
- Borrowing against equity reduces your cushion if home values fall.
- Using home equity to pay off credit cards only helps if you don't run the cards back up.
Consider a home equity loan, too
A home equity loan is a fixed-rate, lump-sum second mortgage. It keeps your first rate like a HELOC but offers predictable payments like a refinance. See home equity loan vs. HELOC. For HELOC payment changes, read HELOC draw vs. repayment periods.
Calculating a blended rate
When you keep a low first mortgage and add a HELOC, your effective overall rate is a weighted average of the two. Multiply each balance by its rate, add the results, and divide by the total balance. In the example above: ($250,000 × 3.5%) + ($60,000 × 8.5%) = $8,750 + $5,100 = $13,850 in annual interest on $310,000, a blended rate of about 4.47%. That's far below the 6.75% cash-out rate on the entire balance. Run this calculation whenever you compare the two options; it makes the decision clear in a minute.
Questions to ask lenders before you choose
- What are the total closing costs for each option, and can any be waived?
- For the HELOC: what index and margin set the rate, how often does it adjust, and is there a lifetime rate cap?
- How long is the draw period, and what happens to my payment when it ends?
- Can I convert part of the HELOC balance to a fixed rate?
- For the cash-out refinance: what's the maximum loan-to-value, and how does taking cash out affect my pricing?
- Are there early closure fees, annual fees or minimum draw requirements?
Using the money responsibly
Borrowing against your home works best for investments that hold value, like renovations that improve function or energy efficiency, or for replacing much higher-interest debt with a clear payoff plan. It's riskier for vacations, cars or everyday expenses, because you could still be paying for them long after they're gone, with your home on the line.
Frequently asked questions
Is HELOC interest tax-deductible?
Generally only if the money is used to buy, build or substantially improve the home securing the loan, and you itemize. Consult a tax professional.
How much equity do I need?
Lenders usually want you to keep at least 10% to 20% equity after borrowing. Our home equity guide shows how to calculate it.
Which is faster to get?
HELOCs often close faster and with less paperwork, though timelines vary by lender.
