HELOC vs. cash-out refinance: how to choose

How a HELOC works

A home equity line of credit is a revolving line secured by your home, a little like a credit card with a much larger limit. You can borrow up to your limit during the draw period, then repay what you borrowed during the repayment period.

• Your first mortgage stays exactly as it is
• You pay interest only on what you've drawn
• Rates are usually variable, so payments can change
• Your payment can rise when the draw period ends
• Your lender can freeze or reduce the line in some situations, such as a drop in your home's value

How a cash-out refinance works

A cash-out refinance pays off your current mortgage with a new, larger loan. You receive the difference in cash at closing, minus closing costs.

• You get one lump sum
• The new rate applies to your entire balance, not just the cash
• Fixed-rate options give you a predictable payment
• Closing costs are similar to any refinance
• It restarts your loan term, which can mean more total interest over time

Side by side

The key number: your blended rate

Comparing a HELOC rate to a cash-out refinance rate isn't a fair fight. The HELOC rate applies only to the cash you borrow, while the refinance rate applies to everything you owe.

Your blended rate is the weighted average rate across all the debt on your home. If your blended rate with a HELOC is lower than the cash-out refinance rate, keeping your first mortgage is likely the cheaper path, before closing costs.

Blended rate = (mortgage balance × mortgage rate + HELOC balance × HELOC rate) ÷ total balance

When a HELOC usually wins

• Your current mortgage rate is well below today's rates
• You need money in stages, like a renovation paid over several months
• You want a safety net you may never use
• You'd rather avoid the closing costs of a full refinance
• You plan to pay the balance back fairly quickly

When a cash-out refinance usually wins

• Today's rates are near or below your current rate
• You need a large lump sum all at once
• You want one fixed payment instead of two loans
• You also want to change your loan, like removing FHA mortgage insurance or a borrower
• You'd rather not take on a variable rate

Costs and risks to weigh

• Closing costs: refinances usually cost more upfront, and HELOCs can carry appraisal, origination, annual, or early closure fees
• Rate changes: a variable-rate HELOC payment can rise when rates do
• The end of the draw period: HELOC payments can jump when you start repaying principal
• Your home is the collateral: falling behind on either loan can put your home at risk
• Your right to cancel: for most refinances and home equity loans on your primary home, federal law gives you three business days after closing to change your mind

What about taxes?

Interest on a HELOC or on the cash-out part of a refinance may be deductible only in certain cases, such as when the money is used to buy, build, or substantially improve the home that secures the loan. Limits apply. Ask a tax professional how the rules apply to you.

How to decide

1. Know your numbers

   Your current balance, your rate, and how much cash you need.

2. Run the blended-rate check

   Use the calculator above with real quotes, not guesses.

3. Compare total costs

   Include closing costs, fees, and how long you expect to keep the loan.

4. Talk it through

   We can price a HELOC and a cash-out refinance side by side from multiple lenders.