Key Takeaways
- A cash-out refinance replaces your mortgage with a larger loan and gives you the difference as cash. A HELOC adds a second loan on top of your existing mortgage.
- If you can refinance at a lower rate than you currently have, a cash-out refi may save you money. If your rate is already low, a HELOC protects that rate.
- A HELOC offers flexible, revolving access to funds. A cash-out refi gives you one lump sum at closing.
- Use the decision guide at the end to match your current mortgage rate, spending needs, and priorities to the right product.
Check your cash-out loan options. Start here
When you want to tap your home equity for cash, two of the most common options are a HELOC and a cash-out refinance. They both convert equity into money you can use, but they work in fundamentally different ways.
The right choice almost always comes down to one question: What is your current mortgage rate? If you can refinance at a lower rate, a cash-out refi can save you money overall. If your existing rate is already competitive, a HELOC lets you access equity without touching your first mortgage.
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How each product works
How a cash-out refinance works
A cash-out refinance replaces your current mortgage with a brand-new, larger one. The new loan pays off your old mortgage, and the difference between the two loans is paid to you as cash at closing.
For example, if you owe $200,000 on your current mortgage and refinance into a $260,000 loan, you receive roughly $60,000 in cash (minus closing costs). You then make payments on the new $260,000 loan going forward. Your old mortgage no longer exists.
Most lenders cap cash-out refinances at 80% of your home’s value. The exception is VA cash-out refinancing, which allows up to 100% loan-to-value.
Compare your loan options. Start here
How a HELOC works
A HELOC is a second mortgage that sits on top of your existing home loan. Your first mortgage stays exactly as it is. The HELOC opens a revolving credit line, typically up to 80% to 85% of your home’s value minus your current mortgage balance.
During the draw period (usually 5 to 10 years), you borrow what you need, repay it, and borrow again. You make interest-only payments on what you use. After the draw period, you enter the repayment period (10 to 20 years) and pay back any outstanding balance in full.
If you want to pull cash from your home equity, you typically have three loan options: a cash-out refinance, a home equity line of credit (HELOC), or a home equity loan.
A cash-out refinance is a primary mortgage, meaning it replaces your existing home loan in addition to taking cash out. HELOCs and home equity loans are second mortgages, meaning they leave your current home loan in place and borrow only from your available equity.
Side-by-side comparison
| Feature | Cash-Out Refinance | HELOC |
|---|---|---|
| Loan type | Primary mortgage (replaces existing) | Second mortgage (adds to existing) |
| How you get money | One-time lump sum at closing | Revolving credit line, draw as needed |
| Interest rate | Fixed (typically) | Variable (some offer fixed conversion) |
| Monthly payments | One mortgage payment (higher amount) | Two payments: existing mortgage + HELOC |
| Borrowing limit | Up to 80% CLTV | Up to 80% to 85% CLTV |
| Closing costs | 2% to 5% of entire new loan amount | 2% to 5% of HELOC amount (smaller loan = lower total costs) |
| Time to close | 30 to 45 days typically | 2 to 6 weeks (some online lenders faster) |
| Can you re-borrow? | No (need a new refinance) | Yes, during draw period |
| Impact on existing mortgage | Replaces it entirely | No change to existing mortgage |
*Loan limits for HELOCs and home equity loans vary by lender. Maximum loan amount represents the total loan-to-value ratio, including the primary mortgage. Your existing loan balance will be subtracted from your maximum loan amount to determine how much equity you can borrow.
How they’re similar
Both products are mortgage loans secured by your home. That means lower interest rates than credit cards or personal loans, but it also means your home is on the line if you can’t make payments.
Both require a home appraisal to determine your property’s current value. Both have closing costs, though the amounts differ. And interest on both may be tax-deductible if the funds are used to buy, build, or substantially improve your home.
Check your HELOC options. Start here
Key differences explained
Your existing mortgage rate
This is the single most important factor. A cash-out refinance replaces your current mortgage entirely. If your existing rate is 3.5% and current rates are 6.5%, refinancing means paying 6.5% on your entire mortgage balance, not just the cash you take out. That can cost thousands more per year.
A HELOC leaves your 3.5% rate untouched. You only pay the higher HELOC rate on the amount you actually borrow from the credit line.
“If refinancing would increase your rate on the full balance, a HELOC is almost always the better choice,” says Dennis Shirshikov, strategist at Awning.com and professor of economics and finance at City University of New York.
One payment vs. two
A cash-out refinance rolls everything into one mortgage payment. A HELOC creates a second payment on top of your existing mortgage. Some borrowers strongly prefer one payment for simplicity. Others prefer two payments because it keeps their original low-rate mortgage intact.
Find your lowest HELOC rate. Start here
Flexibility vs. certainty
“A cash-out refi bundles up your existing mortgage and refinances the entire thing. The money received from it is in one lump sum of cash, so you can take the draw right away,” Shirshikov explains. That certainty is valuable for large, one-time expenses.
A HELOC gives you flexibility. “You can use and pay back the loan multiple times, as your line of credit will remain open for the entire draw period,” notes Carol Toren-Edmiston, SVP and head of Consumer Direct Lending at Flagstar Bank.
Closing costs
Cash-out refinance closing costs run 2% to 5% of the entire new loan. On a $300,000 refinance, that’s $6,000 to $15,000. HELOC closing costs are 2% to 5% of the HELOC amount, which is usually much smaller. On a $60,000 HELOC, that’s $1,200 to $3,000. Some HELOC lenders waive closing costs entirely, though they may charge higher rates in exchange.
Payment predictability
Cash-out refinances typically come with fixed rates and fully amortizing payments. “There is no balloon payment expected after 10 years, which many HELOCs can have,” says Sean Grzebin, head of Consumer Originations at Chase Home Lending. “This is why a cash-out refinance is often an option customers find more predictable and easier to manage.”
HELOC rates are variable, and the transition from draw period to repayment can cause payment shock if you’re not prepared for it.
When a HELOC is better
When you already have a low mortgage rate
If you bought or refinanced when rates were near historic lows (2020 to 2022), replacing that rate with today’s higher rate to get cash doesn’t make financial sense. A HELOC preserves your low first-mortgage rate and borrows only from available equity.
When you need ongoing access to funds
If your expenses will happen over months or years (phased renovations, college tuition, business expenses), a HELOC lets you draw as needed. You pay interest only on what you use, and you can repay and re-borrow during the draw period.
When your home is nearly paid off
If you’re close to owning your home free and clear, taking out a new 30-year mortgage through a cash-out refi restarts the clock. A HELOC or home equity loan accesses your equity without replacing a nearly-paid-off mortgage.
When you want lower closing costs
HELOC closing costs are based on a smaller loan amount than a cash-out refi. If minimizing upfront costs is important, a HELOC is usually cheaper to open.
Check your HELOC eligibility. Start here
When a cash-out refinance is better
When you can lower your mortgage rate
If current rates are lower than your existing rate, a cash-out refinance gives you cash and a lower rate on your entire balance. This is the scenario where a refi is clearly superior. “This is an attractive option if doing so lowers your interest rate,” Camarillo suggests.
Check your cash-out refinance eligibility. Start here
When you want one predictable payment
A cash-out refi consolidates everything into a single fixed-rate mortgage payment. No second payment, no variable rate risk, no draw-period-to-repayment transition. For borrowers who want simplicity above all, this is a significant advantage.
When you want to change your loan term
Refinancing lets you reset your repayment timeline. You can shorten to a 15-year term to pay off your home faster, or extend to 30 years to lower monthly payments (though you’ll pay more total interest). A HELOC doesn’t change the terms of your existing mortgage.
When you need a large lump sum
If you need $80,000 or more at once, a cash-out refi may offer a better rate than a HELOC for that amount. Larger second mortgages can carry higher rates, and the single-payment structure of a refi avoids the risk of variable HELOC rates on a big balance.
Third option: Home equity loan
A home equity loan combines elements of both. Like a HELOC, it’s a second mortgage that leaves your first mortgage untouched. Like a cash-out refi, it gives you a lump sum with a fixed rate and predictable payments.
A home equity loan often makes sense when you want to protect your existing mortgage rate but need a one-time payout rather than a credit line. Closing costs are typically lower than a cash-out refinance, and the fixed rate provides certainty a HELOC does not.
Verify your home equity loan eligibility. Start here
Your next steps
- Check your current mortgage rate. This is the starting point. If you don’t know it, look at your latest mortgage statement or call your servicer.
- Take the decision guide below to see which product aligns with your situation.
- If the guide points to a cash-out refi: Get refinance rate quotes. Compare the new rate to your current rate. Calculate whether the total cost (rate increase on full balance + closing costs) is worth the cash you’d receive.
- If the guide points to a HELOC: Compare HELOC offers from multiple lenders. Look at the margin above prime, draw period length, repayment terms, and whether a fixed-rate lock option is available.
- If it’s a close call: Get quotes for both from the same lender and compare total cost of borrowing over 5 and 10 years. The math will usually make the answer obvious.
Time to make a move? Let us find the right mortgage for you
Not sure which option fits your situation?
Choosing between a HELOC and cash-out refinance can be a difficult decision. This quick guide helps you compare both—based on your goals, timeline, and financial profile.
Download the decision guide
HELOC vs. cash-out refinance FAQ
Yes. In many cases, the cash-out refinance proceeds can be used to pay off the existing HELOC, consolidating everything into one loan. The HELOC lender must agree to subordinate or release their lien for the refinance to close.
HELOCs typically have lower total closing costs because the loan amount is smaller. Cash-out refinance closing costs are based on the entire new mortgage amount, which is much larger. Some HELOC lenders waive closing costs entirely.
HELOCs often close faster, sometimes in 2 to 3 weeks with online lenders. Cash-out refinances typically take 30 to 45 days because they involve full mortgage underwriting, appraisal, and title work on the entire property.
Interest on both may be tax-deductible if you use the funds to buy, build, or substantially improve your home and you itemize deductions. Using the money for debt consolidation or other non-home purposes means the interest is generally not deductible. Consult a tax professional.
When rates are high relative to your existing mortgage, a HELOC is usually better. You only pay the higher rate on the equity you borrow, not your entire mortgage balance. When rates are low or falling, a cash-out refi is more attractive because you can lower your rate on everything.
HELOC rates are variable, so they typically drop when market rates fall. You’d benefit automatically. You could also refinance your first mortgage at that point (without cash out) to lower your primary rate, while keeping the HELOC open separately.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
By refinancing an existing loan, the total finance charges incurred may be higher over the life of the loan.