Last updated: October 5, 2026 · All rates are examples for illustration, not current offers.
If you have built equity in your home and need cash, the two most common tools are a home equity line of credit (HELOC) and a cash-out refinance. Both are secured by your home. The best choice depends mostly on one number: the rate on the mortgage you already have.
How they work
| HELOC | Cash-out refinance | |
|---|---|---|
| Structure | Second lien; revolving line of credit | Replaces your first mortgage with a bigger one |
| Rate | Usually variable, tied to the prime rate | Usually fixed |
| How you get money | Draw as needed during the draw period (often 10 years) | One lump sum at closing |
| Payments | Often interest-only during the draw period, then principal and interest | One payment on the whole new loan |
| Closing costs | Usually low; some lenders charge annual fees | Similar to a full mortgage, often 2%–5% of the new loan |
| Effect on your first mortgage | Leaves it unchanged | Replaces it, including its rate |
Example: you need $50,000
Your home is worth $450,000. Your current mortgage balance is $269,091 at 3.5%, with a payment of $1,347.13 and 25 years left.
| Option | New total monthly payment | Increase |
|---|---|---|
| Keep mortgage + $50,000 HELOC at 8.5%, interest-only | $1,701.30 | +$354.17 |
| Keep mortgage + HELOC in repayment (20 years at 8.5%) | $1,781.04 | +$433.91 |
| Cash-out refinance: new $319,091 loan at 6.75%, 30 years | $2,069.62 | +$722.49 |
The HELOC wins clearly here because the cash-out refinance would move your entire $269,091 balance from 3.5% to 6.75%. That is the most common mistake people make with cash-out refinancing.
The HELOC’s risks
- Variable rate: if the HELOC rate rose from 8.5% to 10.5%, the interest-only payment on $50,000 would go from $354.17 to $437.50.
- Payment jump at the end of the draw period, when principal repayment begins.
- Interest-only costs add up: paying only interest for 10 years and then repaying over 20 at 8.5% means about $96,639 in total interest on $50,000. Paying principal early cuts that sharply.
- Lenders can freeze or reduce unused credit lines if home values fall.
When a cash-out refinance can be better
- Current rates are close to or below your existing mortgage rate.
- You need a large lump sum and want a single fixed payment.
- You also want to change your loan in another way, such as moving from an ARM to a fixed rate.
See the full math on limits and costs in cash-out refinance: how much can you really borrow.
A third option: the home equity loan
A home equity loan is a fixed-rate, lump-sum second mortgage. It keeps your first mortgage like a HELOC does, but with a predictable payment. Compare it in second mortgage vs. refinancing.
Before you borrow against your home
- Your home secures the debt; missing payments can lead to foreclosure.
- Most lenders limit total borrowing (first mortgage plus HELOC) to around 80% to 90% of your home’s value. In our example, borrowing $50,000 brings the combined total to about 71%.
- Compare offers from several lenders, including fees, rate caps and draw terms.
Frequently asked questions
What is the difference between a HELOC and a cash-out refinance?
A HELOC is a separate line of credit secured by your home, usually with a variable rate, that you draw from as needed. A cash-out refinance replaces your whole mortgage with a larger new loan and pays you the difference in one lump sum.
Is a HELOC cheaper than a cash-out refinance?
Often, if your current mortgage rate is much lower than today’s rates, because a HELOC leaves that low-rate loan in place. In our example, adding a $50,000 HELOC costs $354.17 a month interest-only, while a $50,000 cash-out refinance raises the payment by $722.49.
What happens when the HELOC draw period ends?
The repayment period begins: you can no longer borrow, and payments rise to cover principal plus interest. A $50,000 balance at 8.5% repaid over 20 years costs $433.91 a month, versus $354.17 interest-only.
Can HELOC rates go up?
Yes. Most HELOCs have variable rates tied to the prime rate, so payments rise when rates rise. Some lenders offer an option to lock part of the balance at a fixed rate.
Sources: CFPB: Buying a House; CFPB: What is a HELOC? Example calculations by ToolStackIA.
This article is for educational purposes only and is not financial advice. Loan programs, rates and rules change; confirm details with your lender or a HUD-approved housing counselor.