Millions of homeowners locked in mortgage rates between 2% and 4% in 2020–2022, and many have since built up substantial equity. When they need cash for a renovation, tuition or paying off high-rate debt, there are two main options:
- a cash-out refinance, which replaces the whole mortgage with a bigger one;
- a home equity line of credit (HELOC), a second loan that sits on top of the existing mortgage.
The right choice hinges mostly on one number: your current mortgage rate compared with today’s rates.
The key difference in one sentence
A cash-out refinance moves your entire mortgage balance to today’s rate. A HELOC charges its (usually higher) rate only on the cash you borrow, and leaves your existing mortgage untouched.
The blended-rate test
To compare, work out your blended rate: the average rate across all your home debt, weighted by balance.
Example. You owe $280,000 at 3.25% and need $60,000:
- HELOC route: $280,000 at 3.25% plus $60,000 at 8.25%. The blended rate is (280,000 × 3.25% + 60,000 × 8.25%) ÷ 340,000 = 4.13%.
- Cash-out refinance route: all $340,000, plus closing costs, at 6.5%.
Even though the HELOC’s rate is nearly two points higher than the refinance rate, the blended cost of keeping the old mortgage is more than two points lower. If the blended rate beats the refinance rate, the HELOC route is almost always cheaper over any realistic horizon.
What it looks like over 10 years
Running that example through our cash-out refinance vs HELOC calculator. The assumptions:
- Refinance: a 30-year refi with 3% closing costs rolled into the loan.
- HELOC: a 10-year interest-only draw period and $750 in costs.
- Existing mortgage: 24 years left.
| Over 10 years | Cash-out refinance | Keep mortgage + HELOC |
|---|---|---|
| Monthly payment today | $2,215 | $1,814 |
| Interest + closing costs | $223,013 | $127,377 |
| Still owed after 10 years | $297,153 | $248,955 |
The HELOC route saves about $95,600 over ten years and leaves nearly $50,000 less owed. The gap comes from refinancing $280,000 of 3.25% debt at 6.5%. The new $60,000 is a small part of it.
When a cash-out refinance wins
The math flips in several situations:
- Your current rate is at or above today’s rate. If you’re paying 6.9% and can refinance at 6.25%, lowering the rate on the whole balance can beat a separate HELOC. In our tests that scenario saved roughly $15,000 over ten years.
- You need a large amount for a long time and want a fixed rate for all of it. A cash-out refi gives certainty. A HELOC’s rate is usually variable.
- You want to remove mortgage insurance or change loan type, for example moving from an FHA loan to a conventional loan.
- You want a single payment and can accept resetting the term.
Don’t forget closing costs and time horizon
Closing costs on a cash-out refinance typically run 2%–5% of the new loan. On a $350,000 loan, that is $7,000 to $17,500, often rolled into the balance and charged interest for 30 years. Many HELOC lenders waive closing costs, though some charge an appraisal, an annual fee, or an early-closure fee if you close the line within a few years.
Your time horizon matters too. If you plan to sell or refinance again within a few years, low upfront costs favor the HELOC. If you plan to hold the loan for decades and rates have fallen, the refinance has more time to pay back its costs. Our calculator plots both options’ cumulative costs so you can see any break-even year.
Understand HELOC payment shock
A HELOC usually has two phases:
- a draw period, often 10 years, with interest-only payments;
- a repayment period, often 20 years, when principal and interest are both due.
The payment can jump sharply when the repayment period begins. On $60,000 at 8.25%, the interest-only payment is about $413 a month. Once repayment starts, it rises to about $511.
Plan for it by:
- paying principal voluntarily during the draw period;
- asking whether you can lock part of the balance at a fixed rate;
- stress-testing a rate rise with our HELOC payment calculator.
Variable rates: the HELOC’s main risk
Most HELOCs are priced at the Prime Rate plus a margin, so your rate moves when the Federal Reserve changes short-term rates. A two-point rise on a $60,000 interest-only balance adds about $100 a month. Before choosing a HELOC, find out:
- the margin and any introductory rate;
- the lifetime rate cap;
- whether fixed-rate conversion options exist;
- whether the lender can freeze or reduce your line if home values fall. Federal rules allow this in certain circumstances.
How much can you borrow?
Both options are limited by loan-to-value ratios:
- Cash-out refinance: usually up to 80% loan-to-value for a conventional loan on a primary residence.
- HELOC: many lenders allow combined loan-to-value (all loans ÷ home value) of 80%–85%, and some up to 90%.
Estimate your limit with the home equity calculator.
A quick decision checklist
- Is your current mortgage rate well below today’s refinance rates? Lean toward a HELOC or a home equity loan.
- Is your current rate higher than today’s rates? A cash-out refinance deserves a serious look.
- Do you need all the money at once, and want a fixed payment? Consider a fixed-rate home equity loan, a lump-sum second mortgage that keeps your first mortgage intact.
- Can you afford the HELOC’s repayment-period payment, and a rate 2–3 points higher? If not, borrow less or choose a fixed-rate option.
- Compare total cost over the years you’ll actually keep the loan, not just the monthly payment.
A note on taxes
Interest on either loan is deductible only if:
- the money is used to buy, build or substantially improve the home that secures it;
- you itemize;
- your total qualifying mortgage debt is within the $750,000 limit.
Cash used to pay off credit cards or buy a car doesn’t qualify. See IRS Publication 936.
Sources:
- CFPB mortgage and home equity resources
- Regulation Z §1026.40 (home equity plans)
- Freddie Mac Primary Mortgage Market Survey
- IRS Publication 936