Key takeaways
- A cash-out refinance replaces your whole mortgage; a HELOC or home equity loan adds a second loan.
- If your current mortgage rate is low, a second lien usually keeps total borrowing costs lower.
- HELOCs offer flexible draws with variable rates; home equity loans give a fixed lump sum.
- All three are secured by your home, so missed payments can put it at risk.
In this guide
A cash-out refinance replaces your mortgage with a larger loan and pays you the difference. A HELOC adds a revolving credit line as a second loan, and a home equity loan adds a fixed lump sum. If your current rate is low, a second loan is usually cheaper.
All three convert home equity into cash, and all three put your home up as collateral. The difference is how they affect your existing mortgage, how you receive the money and how the rate behaves.
Cash-out refinance vs. HELOC vs. home equity loan at a glance
| Feature | Cash-out refinance | HELOC | Home equity loan |
|---|---|---|---|
| Structure | New first mortgage replaces old one | Second lien, revolving line | Second lien, lump-sum loan |
| Rate type | Usually fixed (ARMs available) | Usually variable | Usually fixed |
| How you get money | Lump sum at closing | Draw as needed during draw period | Lump sum at closing |
| Upfront costs | Full refinance closing costs | Often lower; may have annual fee | Often lower than a refinance |
| Effect on current mortgage | Replaced at new rate | Unchanged | Unchanged |
| Typical max borrowing | Commonly 80% LTV for conventional and FHA | Often 80% to 90% combined LTV | Often 80% to 90% combined LTV |
| Payments | One mortgage payment | Interest-only possible during draw; then principal and interest | Fixed monthly payment |
Limits and features vary by lender and program, so treat these as typical patterns rather than rules. In every case, your home secures the debt, and each option reduces the equity you would keep if you sold.
How each option works
Cash-out refinance
You take out a new, bigger first mortgage, pay off the old one and receive the difference. Closing costs apply to the entire loan. Details on limits and uses are in our full guide to the cash-out refinance.
HELOC
A home equity line of credit works like a credit card secured by your house. During a draw period, often around 10 years, you borrow as needed and may make interest-only payments. Then a repayment period, often up to 20 years, begins, and payments rise to cover principal. Rates are usually tied to the prime rate and change over time.
Home equity loan
A home equity loan gives you a single lump sum at a fixed rate, repaid in equal monthly payments over a set term, often 5 to 30 years. It is sometimes called a second mortgage.
The key question: what's your current mortgage rate?
Your existing rate is usually the deciding factor. A cash-out refinance reprices your entire balance, not just the new cash.
The reverse is also true. If current rates are at or below your existing rate, a cash-out refinance can lower the cost of your old balance while providing cash, which a second lien cannot do.
Pros and cons of each
Cash-out refinance - Pros: single payment; fixed-rate options; may lower your rate if market rates have dropped - Cons: highest upfront costs; resets your loan term; reprices your whole balance
HELOC - Pros: borrow only what you need; interest only on the amount drawn; lower upfront costs - Cons: variable rate can rise; payment can jump when the draw period ends; lender can freeze or reduce the line in some circumstances
Home equity loan - Pros: fixed rate and payment; keeps your first mortgage intact; good for one-time costs - Cons: interest on the full amount from day one; higher rates than first mortgages are common; a second payment to manage
Which option fits your situation?
| If you... | Consider |
|---|---|
| Have a low first-mortgage rate and need a set amount | Home equity loan |
| Have a low first-mortgage rate and need money over time | HELOC |
| Would benefit from refinancing anyway and need a large sum | Cash-out refinance |
| Want an emergency backstop you may never use | HELOC, with discipline |
| Need payment certainty on a fixed budget | Home equity loan or fixed-rate cash-out refinance |
For a staged renovation such as a bathroom remodel, a HELOC's flexibility is often useful. For a single, known bill like a roof replacement, a fixed-rate home equity loan provides a predictable payment.
Costs to compare before you choose
- Closing costs: A cash-out refinance applies fees to your full balance. Our guide to refinance closing costs explains each line.
- Annual or inactivity fees: Common on some HELOCs.
- Early closure fees: Some HELOCs charge if you close the line within a few years.
- Rate caps: Check whether a HELOC has a lifetime cap and whether you can convert part of the balance to a fixed rate.
Qualifying for each option
Lenders look at similar factors for all three: credit score, debt-to-income ratio and how much equity remains after the new borrowing. There are some practical differences:
- Cash-out refinance requires full underwriting on the entire new loan, almost always with an appraisal, and a waiting period after your last refinance or purchase.
- HELOCs may use automated valuations for smaller lines, and some lenders qualify you on the payment at a fully indexed rate rather than the introductory rate.
- Home equity loans usually require a solid score and moderate DTI because they are second liens, which lenders see as riskier than first mortgages.
Our overview of refinance requirements covers typical thresholds for the first-mortgage route.
The bottom line
When your existing mortgage rate is low, a HELOC or home equity loan usually costs less than a cash-out refinance because it leaves that rate alone. When rates have fallen below yours, a cash-out refinance can deliver both savings and cash. Whichever you choose, borrow only what you need, because your home secures the debt.
Frequently asked questions
Is a HELOC cheaper than a cash-out refinance?
Often, when your existing mortgage rate is lower than current rates or you need a modest amount. A HELOC usually has lower upfront costs and leaves your first mortgage alone. But HELOC rates are typically variable and can rise. If current rates are at or below your mortgage rate and you need a large sum, a cash-out refinance may cost less over time.
Which is better for home improvements, a HELOC or a home equity loan?
A HELOC suits projects paid in stages or with uncertain costs, since you draw only what you need and pay interest only on what you use. A home equity loan suits a single project with a known price, such as a roof replacement, because it provides a fixed rate and predictable payment. Many homeowners pick based on whether they value flexibility or certainty.
How much can I borrow with a HELOC?
Lenders commonly limit your combined loan-to-value ratio, meaning your first mortgage plus the HELOC, to somewhere around 80% to 90% of your home's value, though limits vary by lender, credit score and property. Multiply the home value by the allowed percentage and subtract your current mortgage balance to estimate the maximum line.
Can I have a HELOC and a cash-out refinance at the same time?
You can hold a HELOC alongside a first mortgage, including one that was a cash-out refinance, if you have enough equity and qualify. If you refinance your first mortgage while you have a HELOC, the HELOC lender must usually agree to stay in second position through a subordination agreement, or the HELOC is paid off in the refinance.
Do HELOCs and home equity loans have closing costs?
They often do, but they are usually lower than a full refinance because the loan is smaller. Some lenders offer reduced or no-closing-cost HELOCs but may charge an annual fee or require you to keep the line open for a minimum period to avoid repaying waived costs. Read the fee disclosure carefully before you apply.
Official Resources & Further Reading
Use these resources to check current guidance. Requirements and availability may vary by state and provider.
This guide is for general educational purposes and is not individualized financial, legal, tax or insurance advice. Product terms, rates and availability vary by provider and location. How we make money.
