HELOC vs Cash-Out: Which Should You Choose?
A HELOC is usually the better choice when your current mortgage rate is below today’s market, because it leaves that loan untouched and adds a separate credit line. A cash-out refinance replaces your whole mortgage with a new, larger one at today’s rate, which makes sense when that rate is close to or below what you already pay. A HELOC’s rate is usually variable; a cash-out refinance is usually fixed.
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Key Numbers
| Statistic | Value | Source |
|---|---|---|
| HELOC interest rate type | Variable in most plans | CFPB |
| HELOC structure | A draw period, followed by a repayment period | CFPB, home equity line of credit brochure |
| Collateral for both | Your home | CFPB |
Home Equity Line of Credit
A revolving credit line secured by your home, added on top of your existing mortgage.
Cash-Out Refinance
A new, larger first mortgage that pays off the old one and gives you the difference in cash.
Side-by-Side Comparison
| Feature | HELOC | Cash-Out Refi |
|---|---|---|
| Your existing mortgage | Stays in place with its current rate | Paid off and replaced |
| Interest rate | Usually variable | Usually fixed |
| How you receive the money | Draw as needed during the draw period | One lump sum at closing |
| What you pay interest on | Only the amount drawn | The full new loan balance |
| Closing costs | Often lower | Full refinance closing costs on the whole loan |
| Payment over time | Can rise with rates, and again when repayment begins | Fixed principal and interest on a fixed-rate loan |
When to Choose Each Option
Choose HELOC If:
- Your first mortgage rate is well below today’s rates
- You need funds over time, such as for a renovation
- You may not use the full amount
- You can handle a payment that moves with rates
Choose Cash-Out Refi If:
- Today’s rate is near or below your current rate
- You want one fixed payment
- You need a large lump sum at once
- You also want to change your loan term
The Bottom Line
Work out the blended cost. Keeping a low-rate first mortgage and adding a HELOC is often cheaper than refinancing the whole balance at a higher rate, even when the HELOC rate itself is higher. If rates have fallen to where a refinance improves your first mortgage too, cash-out can win on both counts.
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