HELOC vs. Cash-Out Refinance: Which Is Right for You?
When you need to tap into your home's equity, you generally have two primary options: a Home Equity Line of Credit (HELOC) or a cash-out refinance. Both let you convert your equity into cash, but they work very differently. Understanding these differences is key to choosing the right financial tool for your needs.
What is a HELOC?
A HELOC is a revolving line of credit, much like a credit card. A lender approves you for a certain credit limit based on your home equity. You can draw funds as you need them during a specific "draw period" (usually 10 years). During this time, you typically only have to make interest payments on the amount you've borrowed. After the draw period ends, you enter the "repayment period" (usually 20 years), where you must pay back both principal and interest.
What is a Cash-Out Refinance?
A cash-out refinance replaces your current mortgage with a new, larger mortgage. You borrow more than you owe on your home and receive the difference in a single, lump-sum cash payment at closing. For example, if your home is worth $450,000 and you owe $250,000, you might refinance for $350,000. This would pay off your original mortgage and give you $100,000 in cash.
HELOC
How you get funds
Revolving line of credit (borrow as needed)
Interest Rate
Typically variable, tied to Prime Rate
Repayment
Interest-only payments during draw period
Loan Structure
A second mortgage (you keep your first)
Best For
Ongoing projects, emergency funds, flexibility
Cash-Out Refinance
How you get funds
Lump-sum cash payment at closing
Interest Rate
Typically fixed for the life of the loan
Repayment
Principal + interest payments from day one
Loan Structure
Replaces your original mortgage entirely
Best For
Large one-time expenses, debt consolidation
Pros and Cons
HELOC
- Pros: Flexibility to borrow only what you need, potentially lower initial closing costs, interest-only payment option during the draw period.
- Cons: Variable interest rates mean your payments can rise, the temptation to overspend, two separate mortgage payments.
Cash-Out Refinance
- Pros: A predictable fixed interest rate, one single mortgage payment, you receive all funds upfront.
- Cons: You're replacing your entire mortgage, so if your original rate was low, you could end up with a higher rate on your full mortgage balance. Closing costs can be higher.
Which One Should You Choose?
The best choice depends on your financial situation and goals.
- Choose a HELOC if: You have a great interest rate on your primary mortgage and don't want to lose it. You need funds for ongoing projects with unpredictable costs, like a home renovation, or want a readily available emergency fund.
- Choose a Cash-Out Refinance if: Current mortgage rates are lower than your existing rate. You need a large, fixed amount of money for a specific purpose, like consolidating high-interest debt or paying for college tuition, and you prefer the stability of a fixed payment.
Scenario Showdown
- For a Kitchen Remodel ($50,000 budget, uncertain costs): A HELOC is likely better. You can draw funds as invoices come in, and you only pay interest on what you use. If the project comes in under budget, you've saved on interest.
- To Consolidate $80,000 in High-Interest Debt: A Cash-Out Refinance is often a great choice. You get the full amount upfront to pay off all debts at once, replacing them with a single, predictable (and likely lower-interest) mortgage payment.
Comparison FAQs
This is a major argument in favor of a HELOC. A HELOC is a second, separate loan, so it allows you to keep the great rate on your primary mortgage. A cash-out refinance, on the other hand, would force you to give up that low rate and apply a new, potentially higher rate to your entire mortgage balance.
Generally, a HELOC can be slightly faster to close than a cash-out refinance. The underwriting process for a HELOC is often simpler. However, the timeline for both depends heavily on the lender and the complexity of your financial situation, typically ranging from two to six weeks.
Yes. Cash-out refinances often have higher closing costs, similar to a traditional mortgage (2-5% of the loan amount). HELOCs may have lower upfront costs, and some lenders even waive them entirely, but they might have other fees like an annual fee. It's crucial to compare the full fee structure for both options.
Last Updated: June 29, 2025
Author: The HELOCcalc.com Editorial Team
Disclaimer: This article provides a general comparison for educational purposes. The best option for you depends on your individual financial situation, credit history, and goals. Always consult with a qualified financial advisor.