Cash-Out Refinance vs. HELOC: Which Home Equity Option Is Right for You?
Home equity can be a powerful financial tool - but choosing the wrong way to access it can create long-term budget stress. Two of the most common options are a cash-out refinance and a home equity line of credit (HELOC). While both let you tap your home’s value, they work very differently and carry different risks.
This guide breaks down how each option works, how they affect your monthly payment, interest costs, and flexibility - and how to decide which one fits your financial situation.
What Is a Cash-Out Refinance?
A cash-out refinance replaces your existing mortgage with a new, larger loan. You receive the difference between the old balance and the new loan amount as cash at closing.
Because it’s a full refinance, your original mortgage is paid off and replaced with a new loan that includes both your remaining balance and the equity you’re withdrawing.
- Single loan with one monthly payment
- Often fixed interest rates
- Closing costs similar to a standard refinance
- Loan term resets (often 30 or 15 years)
What Is a HELOC (Home Equity Line of Credit)?
A HELOC is a revolving line of credit secured by your home’s equity. It works more like a credit card than a traditional loan.
You’re approved for a maximum credit limit, draw funds as needed during the draw period, and repay what you borrow - often with variable interest rates.
- Second loan (your original mortgage stays intact)
- Usually variable interest rates
- Interest-only payments during draw period
- Flexible borrowing and repayment
Cash-Out Refinance vs. HELOC: Key Differences
Cash-Out Refinance
- One fixed monthly payment
- Replaces existing mortgage
- Predictable long-term costs
- Higher upfront closing costs
HELOC
- Second monthly payment
- Variable interest rates
- Flexible access to funds
- Lower upfront costs
How Each Option Affects Your Monthly Payment
A cash-out refinance spreads repayment over a long term, often keeping monthly payments more predictable - but potentially increasing total interest.
A HELOC may start with low interest-only payments, but those payments can rise sharply when the draw period ends or rates increase.
You can estimate both scenarios using:
Interest Rates and Risk Exposure
Cash-out refinancing usually offers fixed rates, protecting you from future increases. HELOCs typically use variable rates tied to market indexes, which means payments can rise unexpectedly.
This makes HELOCs more sensitive to interest rate cycles - especially risky during periods of rising rates.
When a Cash-Out Refinance Makes Sense
- You want one stable monthly payment
- You plan to stay in the home long term
- You’re refinancing anyway to lower your rate
- You need a large lump sum
When a HELOC Makes Sense
- You need flexible access to funds
- Your existing mortgage rate is very low
- You plan to repay quickly
- You’re comfortable with rate changes
Tax Considerations
Mortgage interest may be deductible when funds are used to buy, build, or substantially improve your home. This applies to both options, but rules change - always confirm with a tax professional.
Common Home Equity Mistakes to Avoid
- Borrowing based on approval instead of affordability
- Ignoring variable-rate risk
- Restarting a 30-year loan unnecessarily
- Using equity for short-term spending
How to Decide Between a Cash-Out Refinance and a HELOC
The best option depends on how long you need the money, how stable you want your payment to be, and how much risk you’re willing to accept.
For a deeper planning framework, visit Refinancing & Equity and run your numbers before committing.
Compare Your Home Equity Options With Real Numbers
Use calculators to estimate payments, interest costs, and long-term impact before choosing.