Refinance vs. HELOC

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Point of Interest

Cash-out refinancing and home equity lines of credit (HELOCs) both let you access the equity in your home for renovation projects, large purchases or emergency payments. The best option for your budget depends on your current finances, existing mortgage amount and payback plan.

Cash-out refinancing or a HELOC? Both let you access your home’s equity — the difference between what’s owed on your mortgage and the assessed value of your property — and use this money however you see fit. While these two equity options are similar in form, they differ in function.

In the battle of cash-out refinance vs. HELOC, which is the better fit for your budget? Understanding the ins and outs of each will help you make the best decision for your needs.

Refinancing your home

Cash-out refinancing works by closing your current mortgage and replacing it with a bigger loan. You can then access the lump sum difference between your previous mortgage balance and the total of the new loan. Since you’re effectively applying for a new mortgage, expect a complete credit check and meet debt-to-income ratio requirements of 50% or less. Your new loan can equal a maximum of 80% of your current home value.

Here’s what this looks like in practice. Let’s say your home is valued at $400,000. With cash-out refinancing, you can apply for a new mortgage topping out at 80% of this value, or $320,000. If you still owe more than $320,000 on your current mortgage, you won’t qualify for a cash-out refinancing loan. But if your current balance is $250,000, you could access up to $70,000 in cash.

Tip: Always ask about closing costs — in many cases, you’ll pay between 2% and 6% of the total loan amount, reducing your available cash.

HELOC

A home equity line of credit operates like a credit card. You borrow against the value of your home for a smaller, second loan you can access on-demand. Since the loan value is much lower than a cash-out refinance, the credit requirements are typically not as strict. And because a HELOC is a secured loan that leverages your existing mortgage as collateral, closing costs are significantly lower.

You’re able to draw from your HELOC on-demand, and you’re only required to repay the amount you use. The catch? Most HELOCs have a specified “draw period” — often 10 or 15 years — after which you can no longer borrow from the line of credit and must pay the borrowed amount back in full. As with a credit card, you’ll be required to make a minimum monthly payment each month, and the total amount of this payment may vary since HELOCs typically come with a variable interest rate. Check out our HELOC calculator to find potential line of credit options.

Tip: Unlike a cash-out refinance, HELOCs let you access up to 85% of the equity in your home based on your creditworthiness and current debt load.

Pros and Cons

Cash-out refinance

Pros

  • Choose the mortgage type that best suits your needs — such as a 15- or 30-year fixed term or 5/1 ARM.
  • Access a lump sum of cash worth up to 80% of the equity in your home.
  • Because a cash-out refinance is considered a second mortgage, you can access lower interest rates than standard equity loans or HELOCs.

Cons

  • Closing costs typically range from 2% to 6% of the total loan amount.
  • A new, larger mortgage may mean a longer repayment period, meaning it will be even longer until you officially own your home.
  • If interest rates are on the rise, you could pay substantially more in interest over time.

HELOC

Pros

  • Only pay back the amount you borrow for an extended period of up to 15 years.
  • Interest paid on a HELOC may be tax-deductible if used to improve your home.
  • Keep your original mortgage term and interest rate so your home payments aren’t jeopardized.

Cons

  • When the draw period ends, you can no longer borrow cash.
  • Having a HELOC means you’ll make two payments each month: your mortgage and your line of credit.
  • Variable interest rates mean your monthly payment isn’t predictable. You may end up paying more than you would with a fixed-rate private loan.

How to choose?

Choosing between a HELOC and a cash-out refinancing largely comes down to personal preference. While you can leverage 85% of equity with a HELOC and just 80% with a cash out refinance, the application and approval process are similar, and in both cases, you’re using the value of your home to secure a cash out amount or line of credit.

If interest rates are low and you need a lump sum for specific projects or payments, consider cash-out refinancing. If you’d prefer to keep the terms of your original mortgage and only borrow what you need, when you need it, opt for a HELOC.

The final word

When it comes to cash out refinance vs. HELOC, both options offer benefits. HELOCs let you borrow from a smaller, second loan and only pay back what you use, while cash-out refinancing gives you access to a lump sum and offers the potential to lower your total mortgage interest.

FAQ

Which is better, cash-out refinance or home equity loan?

It depends on your needs. Cash-out refinancing is great if you need a lump sum amount when interest rates are low, while HELOCs let you borrow exactly what you need, when you need it.

Is paying off a HELOC considered cash-out?

Yes, if the HELOC is paid off using a second mortgage loan.

Are cash-out refinances a good idea?

Cash-out refinances are a good idea if interest rates are low and your budget has room for the new monthly mortgage payment.

Is it smart to take out a home equity loan?

Taking out a HELOC is smart if you want to keep the terms of your original mortgage and only draw cash as needed.

Doug Bonderud

Personal Finance Contributor

Doug Bonderud is an award-winning freelance writer with the unique ability to translate complex financial concepts into approachable, actionable content that both captures reader interest and delivers key brand messaging.