A cash-out refinance replaces your current mortgage with a larger one and hands you the difference in cash. A HELOC leaves your mortgage alone and opens a second, revolving line of credit against your equity. The better choice usually comes down to three things: the rate on your existing mortgage, how much money you need and when, and how much payment uncertainty you can live with.
This guide compares the two side by side, adds the home equity loan (the third option people often confuse with both), and shows how to decide.
TL;DR
- Cash-out refinance: one new, larger mortgage, one payment, new rate and terms on your whole balance. It tends to suit a large, one-time need or a borrower who wants payment stability.
- HELOC: a second loan you draw on as needed, usually at a variable rate. It tends to suit a borrower with a low first-mortgage rate, staged expenses, or a balance that can be repaid quickly.
- Home equity loan: a second loan paid out as a lump sum with fixed monthly payments.
- Cost and risk: refinancing generally carries higher closing costs, while a HELOC’s variable rate and interest-only draw period create payment risk. Either way, your home secures the debt.
Table of Contents
- What each option is
- Rates, closing costs and fees
- Access to funds and monthly payments
- Who tends to choose which
- What lenders look at to approve you
- Taxes: is the interest deductible?
- Other situations to keep in mind
- How to compare offers step by step
- Our perspective
- Get your numbers before you decide
- FAQ
- Sources
What each option is
Cash-out refinance
The Consumer Financial Protection Bureau (CFPB) describes a cash-out refinance as replacing your existing mortgage with a larger one, which means the interest rate and loan terms change for the entire balance, not only the new cash. You pay off the old loan, receive the difference, and make one monthly payment on the new mortgage.
HELOC
A HELOC is a loan that lets you borrow, spend and repay as you go, using your home as collateral, up to a specified amount during a draw period. Your first mortgage stays in place. You can reach the line by check, online withdrawal or a linked card, and during the draw period you may only have to pay interest. When the draw period ends, you can no longer borrow and must repay the outstanding balance over time or in a lump sum.
Home equity loan
A home equity loan, sometimes called a second mortgage, is secured by your home and provides a specific amount as a lump sum. It is typically repaid in equal monthly payments over a fixed term. Think of it as the fixed, one-time version of a HELOC, without touching your first mortgage.
| Feature | Cash-out refinance | HELOC | Home equity loan |
|---|---|---|---|
| What happens to your first mortgage | Replaced by a new, larger loan | Stays in place | Stays in place |
| How you receive money | Lump sum at closing | Draw as needed during the draw period | Lump sum upfront |
| Payments | One payment on the new mortgage | Often interest-only during draw, then repayment | Equal monthly payments over a fixed term |
| Rate behavior | New rate on the whole balance | Typically variable | Typically fixed |
| Closing costs | Generally higher | Generally lower | Generally lower |
Rates, closing costs and fees
The CFPB’s HELOC brochure notes that cash-out refinancing generally has higher closing costs and may take longer to pay off, while HELOC rates are typically variable and repayment amounts vary. That is the core cost trade-off: you pay more upfront to refinance, but you may get a fixed rate and a predictable payment.
A HELOC has its own charges. Lenders must disclose the APR, payment terms and any charges to open, use or maintain the account, including application, annual or transaction fees. Ask for the full disclosure before you compare, and look at total cost over the time you expect to hold the loan, not only the headline rate.
The question that matters most: your current rate
When you refinance, your new rate applies to everything you owe, not only the cash you take out. If your existing mortgage rate is lower than what a refinance would offer today, you would be raising the cost of your whole balance to access a portion of your equity. In that situation a HELOC or home equity loan often makes more sense, because it prices only the new borrowing.
If your current rate is higher than today’s rates, the math flips. A cash-out refinance could lower the cost of your existing balance and give you cash in the same transaction. Our refinance calculator lets you test both scenarios with your own numbers.
A worked comparison to try yourself
Suppose you owe a balance on a low-rate first mortgage and need a sum for a renovation. Run three numbers:
- Refinance: the new monthly payment on the entire larger balance, plus closing costs.
- HELOC: your current mortgage payment plus the interest on the amount you draw, at the lender’s variable rate.
- Home equity loan: your current mortgage payment plus the fixed payment on the lump sum.
Then compare total cost across the years you plan to stay in the home. If you expect to move in a few years, high refinance closing costs have less time to pay for themselves.
Access to funds and monthly payments
The structure of the money matters as much as the price.
- Lump sum or line: a cash-out refinance pays out once, at closing. A HELOC lets you borrow in stages, which suits projects with uncertain costs or expenses spread over time, and you pay interest only on what you use.
- Payment predictability: a new fixed-rate mortgage gives you one payment that does not change. HELOC payments vary with the rate and with how much you owe.
- Draw period risk: the Federal Reserve’s guidance highlights that a HELOC’s variable rate and possible interest-only structure create payment risk. Responsible underwriting tests whether a borrower can repay a fully drawn line and absorb rate increases. You should run the same test on yourself: what would the payment be if you used the whole line and the rate rose?
The CFPB’s guidance frames the central trade-off clearly: a HELOC preserves flexibility and lets you borrow only what you need, while a cash-out refinance gives you a lump sum through a new mortgage with changed terms and potentially longer repayment. In both cases, the CFPB advises considering how much you can afford to pay each month, because missing payments or other loan requirements could put your home at risk of foreclosure.
Who tends to choose which
USA Today’s comparison reports that a HELOC commonly fits a borrower with a low first-mortgage rate, staged or uncertain funding needs, or a smaller balance that may be repaid quickly. A cash-out refinance may fit a large one-time need or a borrower who prioritizes payment stability.
Use this as a starting checklist.
A HELOC may fit if:
- Your current mortgage rate is low and you want to keep it.
- You need money in stages, such as a multi-phase renovation or tuition payments.
- You can repay the borrowed amount quickly.
- You are comfortable with a payment that can change.
A cash-out refinance may fit if:
- You need a large amount all at once.
- Your current rate is not lower than what you could get now, or you want to change the loan type or term.
- You want one fixed payment and a clear payoff date.
- You plan to stay in the home long enough to recover the closing costs.
A home equity loan may fit if:
- You know the exact amount you need.
- You want to keep your first mortgage and also want a fixed payment.
If you are considering an adjustable structure on the new first mortgage itself, read our overview of the adjustable-rate mortgage first so you understand how adjustments work.
What lenders look at to approve you
There is no single universal cutoff. Federal Reserve guidance says home-equity underwriting should consider income, debt levels, credit score and history, loan size, collateral value, lien position and property characteristics, not credit score alone. The FTC adds that the amount available and the rate on a HELOC depend on your income, credit history and the market value of your home.
Cash-out refinances on conventional loans have more defined rules. Under Fannie Mae’s framework, the mortgage being paid off must generally be at least 12 months old, and at least one borrower generally must have held title for six months. Maximum loan-to-value (LTV), combined LTV, credit, reserve and debt-to-income requirements also apply. Fannie Mae’s eligibility matrix shows that cash-out refinances generally have lower maximum LTV limits than some other refinance types, and that exact limits vary by occupancy, number of units, loan type and underwriting method.
In plain terms: you generally cannot borrow against all of your equity. A lender wants you to keep a cushion in the home. Government-backed options have their own rules, and our page on FHA loans explains one of them.
Taxes: is the interest deductible?
Often less than people assume. The IRS says interest on home equity loans and lines of credit is deductible only if the funds are used to buy, build or substantially improve the home that secures the loan. Using the money for debt consolidation, tuition or a vacation does not qualify under that rule. The same publication notes that the itemized deduction for mortgage insurance premiums has expired and can no longer be claimed.
Because your situation depends on your return, how much you borrow in total and whether you itemize, confirm the details with a CPA or enrolled agent before you count on a deduction in your decision.
Other situations to keep in mind
Some homeowners are weighing equity access with a bigger life change in view. If you are a senior comparing a reverse mortgage with these options, or considering a sale later, it helps to understand selling a home with a reverse mortgage before you commit to any new lien. We also help seniors evaluate reverse mortgage options, which work differently from both products in this article because they are designed around age and the homeowner staying in the home.
How to compare offers step by step
- Define the need. Write down the amount, the timing (one payment or several) and what the money is for.
- Check your first mortgage rate. This is the single biggest factor in the decision.
- Estimate your equity. Use a realistic home value and subtract everything you owe.
- Request written estimates for each product, including APR, fees and, for a HELOC, how the variable rate is set and whether there is a cap.
- Stress test the payment. Calculate what you would pay if rates rose and the line were fully used.
- Compare total cost over the years you expect to keep the loan.
Our perspective
Most homeowners come to us asking which product is “better.” We think the better question is which one protects what you already have while giving you what you need. If you hold a low first-mortgage rate, we look hard at keeping it. If your rate is high, or you want to change your loan type or term, a cash-out refinance can be the cleaner solution.
Our role as a mortgage broker is to compare options across lenders for you, so the rate and fee differences are visible before you commit. We offer personalized consultations, refinance calculators and a fully online application designed to move quickly, with closings that can happen in under 21 days.
We support multiple loan types, including 15-year and 30-year fixed, ARM, VA, cash-out and home equity, so the recommendation follows your goals rather than a single product.
David Mordue
Get your numbers before you decide
The fastest way to settle this question is to see real figures for your own home. We compare rates across lenders, walk you through the trade-offs in a personalized consultation, and handle the application online so you are not buried in paperwork.
Ready to see what a refinance could look like? See your refinance options and current rates, or start with our home purchase and refinance services to talk with us.
FAQ
Can I use a HELOC like cash?
Yes, within your credit limit. You can typically access a HELOC by check, online withdrawal or a linked card. During the draw period you may only owe interest, but once it ends you must repay the balance, so plan for the larger payment ahead of time.
Which is better, a cash-out refinance or a home equity loan?
It depends on your current mortgage rate. A home equity loan keeps your first mortgage as it is and adds a fixed-payment second loan. A cash-out refinance replaces the first mortgage, which makes sense mainly when the new rate and terms also improve your overall situation.
Is a home equity loan different from a HELOC?
Yes. A home equity loan pays a lump sum upfront and is repaid in equal monthly payments over a fixed term. A HELOC is a revolving line you draw on as needed, usually at a variable rate, with a draw period followed by repayment.
Is the interest tax-deductible?
Only in specific cases. The IRS limits the deduction for home equity loan and line of credit interest to money used to buy, build or substantially improve the home securing the loan. Ask a tax professional how this applies to your return.
Sources
- Home Equity Lines of Credit (HELOC), CFPB booklet
- Home Equity Loans and Home Equity Lines of Credit, FTC
- Older Americans Housing Guide: Using home equity, CFPB
- Home Equity Lines of Credit brochure, CFPB
- What you should know about Home Equity Lines of Credit, CFPB
- Credit-Risk Management Guidance for Home-Equity Lending, Federal Reserve
- HELOC vs. cash-out refinance: Which is better?, USA Today
- Cash-Out Refinance Transactions, Fannie Mae
- Eligibility Matrix, Fannie Mae
- Publication 936, IRS
- Selling a home with a reverse mortgage