HELOC vs. Cash-Out Refinance: Which Makes More Sense?

The core difference: keep your mortgage or replace it

With a HELOC, you keep your current first mortgage and add a second, open-end line of credit. You can draw from it as needed during the draw period, and you pay interest only on what you use.

With a cash-out refinance, you take out a new, larger mortgage. The CFPB describes it this way: part of the new loan pays off your current mortgage, and you receive the rest in cash. You then make one payment on the new loan, which includes the cash you borrowed and the fees.

Side by side

When a HELOC may make more sense

• You like the rate and terms on your current mortgage. A HELOC leaves that loan untouched, while a cash-out refinance would replace your whole balance at a new rate.
• You need money over time, such as a renovation paid in stages, rather than all at once.
• Upfront costs matter. HELOC costs vary, and the CFPB notes some lenders waive some or all of the up-front costs. Compare each offer’s actual fees with the closing costs of a refinance.

The trade-off: most HELOC rates are variable, so payments can rise, and the lender may freeze or reduce the line if your home’s value falls. Read more in How much equity can I borrow with a HELOC?

When a cash-out refinance may make more sense

• You want one loan and one payment instead of a first mortgage plus a line of credit.
• You need a defined amount at once, and you prefer the predictability a fixed-rate loan can offer.
• The new loan’s terms compare well to what you have now once you include closing costs. The CFPB suggests comparing the cost to refinance with the benefits you expect.

The trade-off: the CFPB notes a cash-out refinance may extend how long it takes to pay off your mortgage, and lower payments over a longer term can mean a higher total cost. If you might move within a few years, you may not have time to recoup the cost of refinancing.

Questions to answer before choosing

1. What is my home worth, and what do I owe on it today?
2. How does the rate on my current mortgage compare to what a new loan would carry — and would replacing it cost me more over time?
3. Do I need the money all at once, or over months or years?
4. What monthly payment can I comfortably afford, including if a variable rate rises?
5. How long do I plan to stay in the home? (Both are generally repaid when you sell.)
6. What are the total costs of each offer, including fees and closing costs?

The CFPB encourages getting estimates from several HELOC lenders to compare costs and features, and suggests you may want to talk with an attorney, accountant, financial planner or a HUD-approved housing counseling agency before taking out a loan.

What this doesn’t tell you

• This is a general comparison. Which option is available — and on what terms — depends on your credit, income, equity, property, state and the lender.
• Some homeowners also consider a home equity loan, which is often fixed-rate. It pays a lump sum like a cash-out refinance but leaves the first mortgage in place.
• Both options put your home at risk if you can’t repay as agreed.

Compare both on our HELOC & home equity and refinance pages.