A HELOC gives you flexible, on-demand access to home equity without touching your first mortgage, making it a smart choice for smaller or staggered expenses. But if you need a large lump sum or want to consolidate high-interest debt, a cash-out refinance could offer more stability — just be prepared to replace your current mortgage.
The problem: you need cash but most of your net worth is tied up in home equity.
You could take out a home equity line of credit, or HELOC, or a cash-out refinance. However, each product serves a different purpose and has distinct requirements to qualify.
Let’s explore each in detail to determine which loan is the right option for your needs.
HELOC vs. Cash-Out Refinance
First, some definitions:
HELOC: Home Equity Line of Credit. A variable-rate credit line that works similarly to a credit card and sits in second position behind your existing first mortgage.
Cash-out refinance: You take out a bigger mortgage than what you owe. A cash-out refi pays off your existing loan and you get the difference in cash.
Which one you choose depends on your situation and financial goals.
Rules of thumb:
Generally, a cash-out refinance makes more sense if you want a large amount of cash and mortgage rates are the same or lower than your existing mortgage.
A HELOC is better when you need smaller sums over a few years. These loans may be more feasible if you have an ultra-low mortgage rate on your existing home loan.
A third option — a home equity loan — is a fixed-rate, lump-sum second mortgage loan that doesn't affect your existing first mortgage.
HELOC Advantages
Does not affect your first mortgage
Low closing costs
Access up to 100% of your home equity for some loan programs
Pay down credit line and re-borrow as needed
No withdrawal requirement until you need it
Faster closing
HELOC Drawbacks
Variable interest rate
Refinancing the primary mortgage later can be difficult due to higher debt-to-income and loan-to-value ratios
Easy access to funds could lead to treating your home like a piggy bank
Cash-Out Refinance Advantages
Get a large amount of cash at a relatively low interest rate
Rate and payment are fixed
Potential to improve the terms of your existing first mortgage
Only one payment each month
Cash-Out Refinance Drawbacks
High closing costs
Potentially lose a lower existing first mortgage rate
Start over with a 30-year mortgage unless you refinance into a shorter term
Situational Comparisons
Which loan product you choose depends on the purpose. Here’s when you might use each loan in various situations.
HELOC vs. Cash-Out Refinance for Renovation
A HELOC is better for small renovations or projects where you are unsure of the cost or your start date. You can open up a HELOC without using any money to start. You do not pay interest until you draw funds. Only draw the cash you need to keep costs down.
If you need $100,000 to $200,000 or more, a cash-out refinance may be better. HELOC rates are high, so your payments would be higher. A cash-out refinance means you’ll lose your first mortgage rate, so proceed carefully.
Related: Three Home Improvements with the Best ROI (and Three with the Worst)
HELOC vs. Cash-Out to Buy Another Home Before You Sell
Neither a HELOC nor a cash-out refinance is ideal if you plan to sell the home soon and you need cash quickly for a down payment. You could open up a HELOC then pay it off weeks or months later, but lenders frown on this.
Instead, try a bridge loan. This is short-term financing (usually for six months to a year) that lenders offer until you secure permanent financing — or sell your home and use the cash to pay off the bridge loan).
HELOC vs. Cash-Out to Buy Additional Real Estate
A cash-out refinance might be better if you need down payment funds for a second home or investment property.
It’s risky to take out a large variable-rate HELOC for this use case. However, you could consider a home equity loan as an option. This is a fixed-rate, lump-sum second mortgage that doesn’t affect your first mortgage.
Related: Using a Cash-Out Refinance to Buy a Second Home
HELOC vs. Cash-Out for Debt Consolidation
Many people have student loans, auto loans, and credit card debt, which carry very high interest rates.
A cash-out refinance might be better to consolidate debt instead of a HELOC that you can continually draw on. This could land you in a worse position than before.
A cash-out refinance can pay off all your debt at closing with lump-sum payments to each company without you ever seeing the money. There’s no temptation to borrow more.
Related: $1 Trillion in Credit Card Debt is Crushing Americans. Time to Consolidate Using Home Equity?
Apply for a Cash-Out Refinance or HELOC
As rates drop, you might find that you can get a cash-out refinance at a similar or lower rate than your current mortgage. If you can reduce your rate and access home equity, a cash-out refinance is a smart move.
But get advice from a mortgage professional. A HELOC might serve your needs just fine without replacing your primary mortgage.
