Two different ways to tap equity
With a HELOC you get a credit limit and borrow against it during a draw period, often around ten years, then repay during a repayment period. The rate is often adjustable. With a cash-out refinance you take a new first mortgage for more than you owe and keep the difference. Your old loan is paid off, so the new rate applies to the entire balance. The CFPB describes both options, and notes that a cash-out refinance usually carries higher closing costs, while a HELOC keeps your first mortgage as it is.
Side by side
| HELOC | Cash-out refinance | |
|---|---|---|
| What happens to your first mortgage | Stays as it is | Replaced by a new loan |
| Rate on the borrowed money | Often variable | Usually fixed |
| Rate on your existing balance | Your original rate | The new rate |
| Closing costs | Often lower; some lenders waive some | Typically higher, like a purchase loan |
| Payments | Often interest-only during the draw, then principal and interest | Principal and interest from the start |
| Access to money | Borrow as needed up to the limit | One lump sum at closing |
| Biggest risk | Rising rates; the lender can freeze or reduce the line | Giving up a low first-mortgage rate; higher closing costs |
| Number of payments | Two (first mortgage + HELOC) | One |
An example with real numbers
Illustrative rates, not quotes. You owe $350,000 on a 3.50% mortgage with 25 years left (payment $1,752). The home is worth $600,000 and you want $60,000. A HELOC is offered at 8.50% variable. A cash-out refinance would be a new $410,000, 30-year loan at 6.75% with 3% closing costs (about $12,300).
| HELOC | Cash-out refinance | |
|---|---|---|
| First mortgage payment | $1,752 | replaced |
| Payment on the $60,000 | $425 (interest-only, if you borrow all of it) | included below |
| Total monthly payment | $2,177 | $2,659 |
| Closing costs | lower | about $12,300 |
Here the HELOC costs about $480 a month less, because the cash-out refinance raises the rate on the whole $350,000. The picture flips if the HELOC rate rises sharply, if you need far more cash, or if your current rate is above the market. Once the HELOC’s repayment period starts, the payment on $60,000 at 8.50% over 20 years would be about $521, bringing the total to $2,273, still lower than the refinance in this example. Run your own comparison with the HELOC vs home equity loan calculator and the refinance calculator.
Risks to weigh
- Variable-rate HELOC payments can rise. Ask for the index, margin, caps and what happens when the draw period ends.
- A lender can freeze or lower a HELOC limit if conditions change, which matters if you are counting on it.
- Both put your home at risk if you cannot repay.
- A HELOC adds a second lien, which can complicate a later refinance of the first mortgage.
- A cash-out refinance resets your term and may add interest over time even if the payment looks manageable.
- Using home equity for spending that does not add lasting value deserves extra caution.
How to decide
- Compare your first-mortgage rate with today's. A big gap in your favor points toward a HELOC or home equity loan.
- Estimate how long you need the money. Short-term needs favor lower upfront costs; long-term needs favor a fixed rate.
- Add up closing costs and divide by the monthly savings to find the break-even on any refinance. See buy now, refinance later for the method.
- Get quotes from at least three lenders and compare the Loan Estimate or the HELOC disclosures line by line. The checklist is in how to compare Loan Estimates.
- Ask each lender about draw period, fees, caps and what happens to your line if values fall.
Related: buy now, refinance later, mortgage recasting and comparing Loan Estimates. If you are weighing a remodel, see what it is likely to return with the remodel ROI calculator.
Sources and further reading
Written by the Reaixo editorial team. Last reviewed . Educational information, not financial, legal or tax advice.