HELOC vs. Cash-Out Refinance: How to Tap Your Home Equity
The single number that decides which option is cheaper — and it's not the amount you're borrowing.
The deciding factor is your existing mortgage rate versus today's market rate. In a worked example where a homeowner's existing rate (4.5%) sat well below the current market rate (6.75%), a HELOC cost roughly $1,540-1,706/month total versus $1,816/month for a cash-out refinance — because refinancing resets your entire balance to today's rate, not just the new cash.
Compare your own numbers with our HELOC calculator and refinance calculator.
Both a HELOC and a cash-out refinance let you turn home equity into cash — but they do it in fundamentally different ways. A HELOC adds a separate line of credit on top of your existing mortgage, untouched. A cash-out refinance replaces your entire mortgage with a new, larger one. That structural difference means the "which is cheaper" answer almost always comes down to one thing: how your current rate compares to today's.
How Each One Works
HELOC
- A revolving credit line secured by your home, on top of your existing mortgage
- Your original mortgage rate and balance stay exactly as they are
- Typically a variable rate, often with an interest-only draw period
- Draw only what you need, when you need it
Cash-Out Refinance
- Replaces your entire mortgage with one new, larger loan
- Your old balance is rolled into the new loan at today's rate
- Usually a fixed rate for the full new term
- You receive the extra amount as a lump sum at closing
Worked Example
A homeowner has a $450,000 home with a $220,000 mortgage balance at a 4.5% rate locked in years ago, and wants to borrow $60,000.
Option 1: HELOC
| Item | Calculation | Result |
|---|---|---|
| Available credit (80% CLTV) | ($450,000 × 0.80) − $220,000 | $140,000 available |
| HELOC interest-only payment (on $60,000 drawn, 8.5%) | $60,000 × (0.085 ÷ 12) | $425/mo |
| Existing mortgage payment (unchanged) | 4.5% on $220,000, 30-yr | ≈$1,114.71/mo |
| Total monthly cost (draw period) | $1,114.71 + $425 | ≈$1,539.71/mo |
Once the draw period ends and the HELOC enters a 15-year repayment schedule, the $60,000 balance amortizes at $590.84/month, bringing the total to roughly $1,705.55/month — still below the refinance option below.
Option 2: Cash-Out Refinance
| Item | Calculation | Result |
|---|---|---|
| New loan amount | $220,000 + $60,000 | $280,000 |
| New rate (today's market) | 6.75%, 30-yr | |
| New monthly payment | ≈$1,816.07/mo |
The HELOC wins here — not because it's inherently cheaper, but because it leaves the original $220,000 at its low 4.5% rate untouched, and only prices the new $60,000 at today's higher rate. The refinance, by contrast, resets the entire $280,000 to 6.75%, including the $220,000 that was previously costing far less.
Worth knowing: This result flips when your existing rate is higher than today's market rate. If you locked in your mortgage at 7.5% and today's rate is 6%, a cash-out refinance that lowers your rate on the entire balance while also pulling out cash can easily beat a HELOC. Always compare your specific existing rate to a current quote before assuming either option wins by default.
Other Differences Worth Knowing
| HELOC | Cash-Out Refinance | |
|---|---|---|
| Rate type | Usually variable | Usually fixed |
| Payout | Draw as needed, revolving | Lump sum at closing |
| Closing costs | Often lower or waived | Typically 2-5% of the full new loan |
| Effect on original mortgage | None — stays as-is | Fully replaced |
The variable rate on most HELOCs is a real tradeoff against the certainty above — a HELOC that looks cheaper today can get more expensive if rates rise further during your draw or repayment period, while a cash-out refinance locks in one fixed payment for the life of the loan.
How to Decide
Start by comparing your existing mortgage rate to a current refinance quote. If your rate is meaningfully below today's market, a HELOC is very likely to come out cheaper overall, since it protects your existing low-rate balance. If your rate is at or above today's market, run both options through the numbers — a refinance might lower your total payment even while adding cash out. Either way, model your specific balance, equity, and rate with our HELOC calculator and refinance calculator before deciding.
Frequently Asked Questions
Is a HELOC cheaper than a cash-out refinance?
It depends entirely on your existing mortgage rate versus today's market rate. In a worked example where the homeowner's existing rate (4.5%) was well below the current market rate (6.75%), a HELOC cost $1,540-1,706/month total versus $1,816/month for a cash-out refinance — because the refinance reset the entire balance to the higher rate, not just the new money borrowed.
When does a cash-out refinance make more sense than a HELOC?
When your existing mortgage rate is higher than today's market rate. In that case, refinancing the whole balance down to a lower rate can reduce your total payment even while pulling out extra cash — the exact opposite of the scenario where a HELOC wins.
Does a HELOC have a fixed or variable rate?
Most HELOCs have a variable rate tied to a benchmark like the prime rate, meaning your payment can rise or fall over the life of the credit line. A cash-out refinance is typically a fixed-rate loan, so the payment stays the same for the full term.
How much can I borrow with a HELOC?
Lenders typically cap combined loan-to-value (CLTV) at around 80% of your home's value, including your existing mortgage balance. Available credit = (home value × CLTV limit) − existing mortgage balance.
Are HELOC or refinance closing costs higher?
Cash-out refinances typically carry closing costs of 2-5% of the full new loan amount, since you're originating an entirely new mortgage. HELOCs often have lower closing costs, and some lenders waive them entirely, since it's a second lien rather than a full mortgage origination.
