HELOC vs. cash-out refinance: Which is better in 2024?

Should I refinance or get a HELOC?

When looking at a HELOC vs cash-out refinance, interest rates are a big factor. If rates fall, many homeowners prefer to refinance because they can get cash back and lower their mortgage rates. But when rates rise, HELOCs are more popular because they let you tap equity without changing the rate or terms on your existing loan.

There are many other pros and cons to consider, too. Here’s what you should know before you decide.

In this article (Skip to...)

• Overview
• Comparison
• Similarities
• Differences
• When to use a HELOC
• When to refinance
• Alternative options

HELOC vs cash-out refinance overview

If you want to pull cash from your home equity, you typically have three loan options: a cash-out refinance, a home equity line of credit (HELOC), or a home equity loan.

A cash-out refinance is a primary mortgage, meaning it replaces your existing home loan in addition to taking cash out. HELOCs and home equity loans are second mortgages, meaning they leave your current home loan in place and borrow only from your available equity.

Refinancing is typically better than a HELOC when you can qualify for a lower rate on your current mortgage loan. If refinancing would increase your rate, a HELOC or home equity loan may be better.

When it comes to HELOC vs cash-out refinance, refinancing typically offers lower interest rates. But you have to refinance your existing loan and the higher resulting balance will lead to bigger monthly payments. Refinancing is typically better than a HELOC when you can qualify for a lower rate on your current mortgage loan.

A HELOC is often better than a cash-out refinance when your existing mortgage has a low rate that you don’t want to replace. A HELOC lets you borrow only what you need from your equity; and since it’s a credit line, if you don’t use it, you don’t have to repay it.

Home equity loans are similar to HELOCs in that they borrow only from your equity and have somewhat higher rates than cash-out refinances. Unlike HELOCs, though, home equity loans offer a one-time sum upfront that you repay in regular monthly installments. The payment schedule on a home equity loan is more like a traditional mortgage.

HELOC vs cash-out refinance comparison

*Loan limits for HELOCs and home equity loans vary by lender. Maximum loan amount represents the total loan-to-value ratio, including the primary mortgage. Your existing loan balance will be subtracted from your maximum loan amount to determine how much equity you can borrow.

HELOC vs cash-out refinance: How are they similar?

Both HELOCs and cash-out refinances are types of mortgage loans. That means the money you borrow — including the cash-back — is secured by your property. The same is true of home equity loans.

Since HELOCs, home equity loans, and cash-out refinances are all secured loans, they enjoy low interest rates compared to unsecured forms of borrowing like personal loans and credit cards. But they share the same risks, too. Since the loan is tied to your home, if you don’t keep up with payments, you could face foreclosure.

HELOC vs cash-out refinance: How are they different?

Despite both being secured mortgages, HELOCs and cash-out refinances work very differently.

How a HELOC works

A HELOC is a revolving line of credit tied to your home’s value. It works like a credit card in that you can borrow up to a maximum credit limit, repay what you borrow, and use it again over a period of time.

HELOCs have two phases. The draw period usually lasts the first 10 years, during which you can borrow from the credit line any time you want up to your set credit limit. Within the draw period, you are required to make only minimum interest payments on any funds you elect to borrow. Borrow nothing and you will owe nothing (unless your lender assesses an inactivity fee).

After the draw phase, you aren’t allowed to borrow additional cash unless your lender authorizes a HELOC renewal. The next phase is the repayment period, often lasting 10 to 20 years, over which time you must pay back any outstanding loan balance.

How a cash-out refinance works

With a cash-out refinance, you replace your current primary mortgage with a new, larger mortgage loan. You take cash out at closing based on the difference between these two loans (minus any closing costs). You can often choose between a fixed-rate cash-out refinance or an adjustable-rate mortgage (ARM).

Many homeowners don’t pull the trigger on a cash-out refi unless the new interest rate will be lower than their current mortgage interest rate.

Differences between a HELOC and a cash-out refinance

The biggest difference between a HELOC and a cash-out refinance is that, with a cash-out refi, you replace your current home loan with a new one that has a bigger balance. A HELOC, by contrast, is a totally separate loan that exists on top of your current mortgage.

If you take out a HELOC or home equity loan, you’ll end up with two monthly payments: one for your existing home loan and another for the HELOC. A cash-out refinance has only one monthly mortgage payment because your cash borrowing is rolled into the new mortgage loan.

“A cash-out refi bundles up your existing mortgage and refinances the entire thing. The money received from it is in one lump sum of cash, so you can take the draw right away. Your existing mortgage no longer exists, and you start payments on the new mortgage right away. This is a way to get the equity from your home directly,” explains Dennis Shirshikov, a strategist at Awning.com and professor of economics and finance at City University of New York.

Another big difference is that a HELOC gives you a flexible source of borrowing over time (like a credit card) as opposed to the one-time payout you get with a cash-out refinance. “You can use and pay back [the loan] multiple times, as your line of credit will remain open for the entire draw period,” notes Carol Toren-Edmiston, senior vice president and head of Consumer Direct Lending at Flagstar Bank.

In addition, HELOCs usually have variable interest rates while cash-out refinance loans typically come with fixed rates.

Finally, “a cash-out refinance [is] fully amortized, meaning there is no balloon payment expected after 10 years — which many HELOCs can have,” says Sean Grzebin, head of Consumer Originations at Chase Home Lending. “This is why a cash-out refinance is often an option customers find more predictable and easier to manage.”

When to use a HELOC

A HELOC can be a better option for many homeowners — especially when mortgage rates are on the rise. Here are a few scenarios where HELOC may be better than a cash-out refinance.

When you already have a low interest rate

It may not make sense to replace your existing primary mortgage loan with a cash-out refinance if you already have a low fixed interest rate. Mortgage rates rose after the Covid pandemic and many homeowners who bought or refinanced during that period would see higher rates now. Resetting your mortgage loan could lead to higher monthly payments and more interest paid over the life of the loan than if you choose a HELOC instead.

When you need an ongoing source of cash

You can draw from a HELOC as you need to, in varying amounts up to your maximum credit limit, any time during the initial draw phase. That often lasts up to 10 years. If you decide you don’t want to borrow any money after opening a HELOC, you don’t have to.

By contrast, a cash-out refinance requires you to take a lump sum of cash upfront that you’ll pay off in full — whether or not you use all the money. And you can’t re-borrow with a cash-out refi. If you need money again in the future, you’d have to refinance again or take out a second mortgage.

When your home is almost paid off

If your current loan is nearly paid off or you own the home outright and want to borrow from it, it likely doesn’t make sense to take a cash-out refi. Why replace an existing mortgage loan with a new one — and pay all those closing costs — if you are nearly done paying it off? In this case, a HELOC or home equity loan is likely a smarter option.

What are the downsides of a HELOC?

Of course, there are also drawbacks to using a HELOC. HELOCs typically have higher rates than cash-out refinance loans. And HELOC rates are variable, meaning they could go up or down, which makes your payment schedule less predictable.

A HELOC may come with closing costs of up to 2-5% of the loan amount, though they’ll be lower than the fees on a cash-out refi since the loan amount is smaller. Some lenders offer no-closing-cost HELOCs, but beware: they often come with higher interest rates.

In addition, depending on the terms of your HELOC, there could be a large balloon payment once the draw phase expires. With a cash-out refi, you have steady fixed principal and interest payments that you can rely on from month to month (assuming you opt for a fixed interest rate).

Finally, HELOC requirements and loan terms vary a lot by mortgage lender. So you want to be extra diligent when shopping around.

When to use a cash-out refinance

In some cases, a cash-out refinance will make more sense than a HELOC or fixed-rate home equity loan. Here are a few examples.

When you can lower your mortgage rate

If your timing is right, cash-out refinancing could offer cash back and a lower mortgage rate on your primary home loan. This could actually save you money on interest compared to a HELOC or home equity loan.

At the time of this writing, interest rates were rising and it was more difficult for homeowners to lower their rates using a cash-out refinance. But mortgage rates change often and the market may have shifted by the time you read this. So check today’s mortgage rates to see what you might be in line for.

When you want to pay off your home sooner

Another benefit of doing a cash-out refi is that you can reset to a shorter loan term if you choose.

Say you have 25 years left on your existing mortgage loan. If you refinance to a 15-year fixed-rate mortgage, you will shave 10 years off your loan repayment schedule. Paying off your loan more quickly should result in less total interest paid over the life of the loan.

There are two things to keep in mind here. The first is that shorter loan terms have higher monthly payments, so you need to make sure your budget can accommodate that. Second is that you don’t have to refinance to pay off your mortgage early. Instead, you can make accelerated mortgage payments toward your principal and accomplish the same goal.

When you want to lower your monthly payment

On the flip side, if you need cash out but want lower mortgage payments, you might be able to accomplish this with a cash-out refinance. By extending your repayment period for another 30 years, you could potentially get cash back while also dropping your monthly payment. But keep in mind you’d likely pay substantially more interest over the life of the loan.

Also, what you pay each month for your new loan will depend greatly on how much cash you take out and your interest rate. This lower-monthly-payment strategy won’t work for all borrowers.

What are the downsides of a cash-out refinance?

A cash-out refinance can be costly. Refinance closing costs often add up to 2-5% of your loan amount. Closing on a cash-out refi takes time, too. You may be able to get approved for a HELOC more quickly. (Though a HELOC still requires a home appraisal, which adds to the closing time.)

Cash-out refinancing also impacts your existing home loan. You could end up paying more in total interest over the new loan’s term. And because you’re taking cash out and likely paying a higher interest rate, your monthly mortgage payments could increase substantially.

Another option: Home equity loans

You aren’t limited to choosing between a HELOC or cash-out refinance. Alternatively, you could select a home equity loan.

Like a HELOC, a home equity loan is a second mortgage distinct from your primary mortgage loan. It lets borrow against your accrued equity, sometimes up to 85% of the home’s value (minus any outstanding mortgage debt). And, like cash-out refinancing, home equity loans usually offer fixed interest rates and predictable payments.

Lenders often charge lower closing costs for a home equity loan than a cash-out refi. The repayment terms may be more favorable, too; for instance, you may be able to take out a home equity loan for as few as 5 years.

Compared to HELOCs, home equity loans are less flexible because they offer a one-time payout rather than a line of credit. But that might be preferred if you’re looking to cover a major expense — like medical bills or a home renovation — and know just how much money you’ll need upfront.

You can learn more at: HELOC vs. home equity loan pros and cons.

HELOC vs cash-out refinance: How to choose

The best advice for anyone considering a HELOC vs cash-out refinance is to be clear about your objectives.

“Do you want to combine your higher-interest rate debt from credit cards or student loans, or use some of your equity to make upgrades to your home? Or do you want to pay off your loan faster or extend the term, which could lower your payment?” Toren asks.

You also want to know the current balance and interest rate on your existing mortgage, as this will play a role in determining your best choice.

Before committing to any kind of financing, “take inventory of your current financial situation, including loan balances and interest rates for all of your debt — such as credit cards, auto loans, and student loans,” Toren adds. Then contact a mortgage lender who can explain your options and help you choose the best loan for your situation.