Cash-Out Refinance vs. HELOC: Which Is Better?
Mike Starr
Founder, MortgageWizardTools · M.S. Organizational Management
Cash-out refinance and HELOC (Home Equity Line of Credit) both let you borrow against home equity, but they serve different needs. The right choice depends on how much you need, when you need it, and your current interest rate.
How They Work
Cash-Out Refinance: Replace your existing mortgage with a new, larger loan. You get the difference in cash. Your entire mortgage is refinanced at the new rate.
HELOC: A second mortgage that works like a credit card. You draw funds as needed during a draw period (typically 10 years), then repay during a repayment period (10-20 years). Your first mortgage stays unchanged.
Side-by-Side
| Feature | Cash-Out Refinance | HELOC |
|---|---|---|
| Structure | New first mortgage | Second mortgage |
| Rate | Fixed | Variable |
| Closing Costs | 2-5% of loan | $0 to $500 |
| Access | Lump sum | Draw as needed |
| First Mortgage | Replaced | Unchanged |
| Max LTV | 80% (conventional) | 85% combined |
| Interest Deductible | If used for home | Only if used for home |
When Cash-Out Refinance Wins
- •Your current rate is higher than today's rates (you benefit from refinancing anyway)
- •You want a fixed rate and fixed payment
- •You need a large lump sum
- •You want to simplify into one mortgage
When HELOC Wins
- •Your current mortgage rate is lower than today's rates (do not want to refinance)
- •You need flexible access to funds (not a single lump sum)
- •You want lower closing costs
- •You are comfortable with a variable rate
The Interest Rate Factor
If your current mortgage is at 3.5% and today's rates are 6.5%, a cash-out refinance means refinancing your entire balance at 6.5% — which may cost more than the benefit of the cash-out. A HELOC lets you keep your 3.5% first mortgage and borrow only the equity portion at a higher rate.
Key Takeaways
- •Cash-out refinance replaces your mortgage; a HELOC adds a second mortgage
- •Cash-out wins if your current rate is high and you want a fixed rate
- •HELOC wins if your current rate is low and you want flexible access
- •HELOCs have lower closing costs but variable rates
- •Consider a home equity loan as a third option (fixed-rate second mortgage)