HELOC vs. home equity loan vs. cash-out refinance
All three turn home equity into cash. They differ in whether you keep your first mortgage, whether the rate is fixed, and how you receive the money.
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What's the difference between a HELOC, home equity loan and cash-out refinance?
A HELOC is a variable-rate line of credit you draw as needed, added behind your mortgage. A home equity loan is a fixed-rate lump sum, also added behind your mortgage. A cash-out refinance replaces your whole mortgage with a bigger one at today's rate. If your current mortgage rate is low, a HELOC or home equity loan usually costs less.
On this page
Side by side
| HELOC | Home equity loan | Cash-out refinance | |
|---|---|---|---|
| Your first mortgage | Stays as is | Stays as is | Paid off and replaced |
| How you get the money | Draw as needed, up to a limit | One lump sum at closing | One lump sum at closing |
| Rate type | Usually variable (prime + margin) | Usually fixed | Fixed or adjustable |
| Rate applies to | Only the amount you've drawn | The new loan amount | Your entire mortgage balance |
| Payments | Often interest-only during the draw period, then principal and interest | Fixed principal and interest from the start | Fixed (or adjustable) principal and interest on the new loan |
| Closing costs | Usually lowest | Low to moderate | Usually highest, similar to a purchase mortgage |
| Lien position | Second lien | Second lien | First lien |
| Best fit | Ongoing or uncertain costs; keeping a low first-mortgage rate | One known expense; wanting a fixed payment | Current rate is at or above today's rates; or simplifying into one loan |
All three are secured by your home, so missing payments puts the home at risk. For a two-way look at the second-lien options, see HELOC vs. home equity loan.
Use a free calculator, or get your HELOC rate from Shawn.
The blended rate: why your first mortgage matters
A cash-out refinance reprices your whole mortgage, not just the new cash. A HELOC or home equity loan leaves the old balance at its old rate. The fair comparison is the blended rate: the weighted average rate across everything you owe.
Example. These are illustrative numbers with stated assumptions, not offers. You owe $300,000 on a first mortgage at 3% and want $60,000 in cash.
- Cash-out refinance: a new $360,000 30-year mortgage at an assumed 6.5%. First-year interest is roughly $360,000 × 6.5% = $23,400. The principal-and-interest payment is about $2,275 a month.
- Keep the mortgage and add a HELOC: $60,000 at an assumed 8%. Interest is $300,000 × 3% + $60,000 × 8% = $9,000 + $4,800 = $13,800 a year. Blended rate: $13,800 ÷ $360,000 = 3.83%. Your existing mortgage payment doesn't change, and the HELOC adds about $400 a month interest-only ($60,000 × 8% ÷ 12).
- Keep the mortgage and add a home equity loan: $60,000 at an assumed 8.5% fixed for 15 years. The added payment is about $591 a month, including principal.
Even though the HELOC's rate is higher than the refinance rate, the blended cost is far lower, because $300,000 stays at 3%. Moving that $300,000 from 3% to 6.5% would add $10,500 a year in interest on its own. Run your own numbers in the HELOC vs. cash-out calculator.
When a cash-out refinance can make sense
- Your current mortgage rate is at or above today's mortgage rates, so refinancing doesn't give up a low rate.
- You need a large amount and want one fixed payment on one loan.
- You want to change the loan itself: drop mortgage insurance, change the term, or remove a borrower.
See HELOC vs. cash-out refinance for a longer look at this choice.
HELOC or home equity loan?
Pick a HELOC when the spending is spread out or uncertain, such as a remodel paid in stages, because you only pay interest on what you draw. Pick a home equity loan when you need one known amount and want a payment that won't change. The HELOC's rate is prime + margin and will move with prime, now 7.00%; some lenders offer a fixed-rate option on part of the balance. Typical HELOC rates are on our rates page.
Costs and qualifying
All three look at credit score, debt-to-income ratio and combined loan-to-value. Second-lien lenders commonly cap CLTV around 80%–85%. A cash-out refinance carries full mortgage closing costs on the entire new balance, while a HELOC's costs are usually much lower. See HELOC closing costs for what to expect.
To see your own numbers, get your HELOC rate from Shawn. Nothing on this page is an offer to lend.
Questions people ask
Is a HELOC cheaper than a cash-out refinance?
Usually, if your current mortgage rate is well below today's rates, because a HELOC leaves that low-rate balance alone. Compare blended rates and closing costs to be sure.
Which has lower closing costs, a HELOC or a cash-out refi?
A HELOC usually does. A cash-out refinance carries full mortgage closing costs on the entire new loan.
Is a home equity loan better than a HELOC?
A home equity loan is better if you want a fixed rate and a fixed payment for a single known expense. A HELOC is better for costs that come in stages, since you pay interest only on what you draw.
Can I have a HELOC and a home equity loan at the same time?
Sometimes. A HELOC and a home equity loan can coexist if your combined loan-to-value stays within the lender's limit, but many lenders won't lend behind two existing liens.
Does a cash-out refinance reset my mortgage term?
Yes. A cash-out refinance is a new mortgage, so a new term starts, often 30 years, unless you choose a shorter one.
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Sources
Official sources behind this guide.
- What is the difference between a home equity loan and a HELOC? · Consumer Financial Protection Bureau
- What you should know about home equity lines of credit (booklet, PDF) · Consumer Financial Protection Bureau
- Regulation Z §1026.40: Requirements for home equity plans · Consumer Financial Protection Bureau