The short version
A cash-out refinance replaces your current mortgage with a new, bigger loan and pays you the difference. A HELOC leaves your mortgage alone and adds a separate line of credit behind it.
| HELOC | Cash-out refinance | |
|---|---|---|
| Your current mortgage | Stays in place, rate and all | Paid off and replaced by a new loan |
| The new rate applies to | Only what you borrow on the line | Your entire new balance |
| Up-front costs | Vary by product and lender | Often about 2% to 5% of the loan amount |
| Payments | Your existing mortgage plus the line | One new mortgage payment |
| Often a fit when | Your first mortgage rate is low | Today's rates beat your current rate |
Why your current rate matters so much
With a cash-out refinance, the new rate applies to everything you owe, not just the cash you take out. If your current mortgage has a lower rate than what's available today, refinancing means giving up that rate on your whole balance to access a smaller amount of cash.
A HELOC avoids that. Your first mortgage keeps its rate, and only the money you borrow on the line is priced at today's terms. For a lot of homeowners with a low first mortgage, that's the deciding factor.
When a cash-out refinance can still win
- Today's rates are at or below your current mortgage rate.
- You want one predictable payment instead of two.
- You need a large amount and plan to stay in the home a long time.
When a HELOC usually makes more sense
- Your first mortgage rate is lower than today's rates.
- You need a specific amount for a project, not a whole new loan.
- You want to avoid the closing costs of a full refinance.
Let's look at your real numbers
The honest answer is that it depends on your rate, your balance, how much you need, and how long you plan to stay. I'm happy to run both side by side so you can see which one actually costs less for you.
Common questions
Does a HELOC replace my mortgage?
No. A HELOC is a separate line that sits behind your first mortgage, so your existing loan and its rate stay in place. A cash-out refinance replaces your mortgage with a new, larger one.
Which costs more up front, a HELOC or a cash-out refinance?
It varies, but cash-out refinance closing costs often run about 2% to 5% of the new loan amount, because you're taking out a whole new first mortgage. HELOC costs depend on the product and lender, so compare the full cost of each.
When does a cash-out refinance make more sense?
If today's rates are at or below your current mortgage rate, or you want one fixed payment for a large amount, a cash-out refinance can be the better fit. If your first mortgage rate is low, a HELOC lets you keep it.
Next: How a HELOC works