| Feature | HELOC | Cash-Out Refinance |
|---|---|---|
| Loan structure | Revolving line of credit (borrow as needed) | New first mortgage with lump sum at closing |
| Interest rate | Variable (Prime + margin) | Fixed (or ARM, your choice) |
| Affects existing mortgage | No (HELOC is in second position) | Yes (pays off and replaces first mortgage) |
| Closing costs | Low ($0-$1K typical) | 2-5% of total loan amount |
| Speed to close | 2-3 weeks | 30-45 days |
| Payment during use | Interest-only on what you've drawn (during draw period) | Full P&I from day one |
| Best for | Ongoing/uncertain expenses (renovation phases, tuition) | Large one-time cash need (debt consolidation, major project) |
| Risk if rates rise | Payment goes up (variable) | Payment is locked (if fixed) |
The complete picture
Both HELOCs and cash-out refinances let you turn home equity into cash, but they work very differently. A HELOC is a second-position revolving credit line — your existing first mortgage stays in place, and you draw funds as needed up to your credit limit. A cash-out refinance pays off your existing mortgage with a new larger one and gives you the difference at closing.
Choose a HELOC when you want flexibility and don't want to disturb a low-rate first mortgage. Most borrowers refinanced into low 3-4% rates in 2020-2021 — replacing those with a 7%+ cash-out refinance is usually a bad trade. HELOCs let you tap equity without giving up the existing rate.
Choose a cash-out refinance when you have a large one-time need, you want a fixed rate, or your existing mortgage rate is already at or above current market. Cash-out refi rates are typically 0.25-0.5% above standard rate-and-term refinance rates, but still well below HELOC rates after the HELOC adjusts.
Frequently asked questions
Which one has a lower rate?+
It depends on the rate environment. In low-rate cycles, cash-out refinances usually have lower rates. In high-rate cycles where HELOCs price off Prime (currently ~8.5%), cash-out refis at 7-8% can be lower. Always compare both at the moment you need the money.
Will a HELOC affect my credit score?+
Opening a HELOC creates a hard inquiry and adds a new account, which can dip your score 5-15 points temporarily. Heavy utilization of the line (above 30-50% of limit) can lower your score significantly. The HELOC itself reports as an installment loan in most cases, similar to a mortgage.
Can I do both?+
Yes. Some homeowners use a HELOC for short-term/flexible needs alongside their primary first mortgage. You can also cash-out refinance and then open a HELOC on top for additional flexibility. Just be cautious about over-leveraging the home.
What happens to my HELOC if I sell the house?+
The HELOC must be paid off at closing from sale proceeds, just like your first mortgage. The title company handles this automatically. If you sell for less than the combined first mortgage + HELOC balance, you'll need to bring funds to closing.