Cash-Out Refinance vs HELOC: Which Should You Choose?
Cash-out refinance vs HELOC: side-by-side
| Cash-out refinance | HELOC | |
|---|---|---|
| What it is | A new first mortgage for more than you owe; you get the difference in cash | A second-lien line of credit you draw from as needed |
| Your current mortgage | Paid off and replaced | Stays in place with its current rate |
| Rate applies to | Your entire new balance | Only what you draw on the line |
| Rate type | Fixed or adjustable | Usually variable; fixed-rate options exist |
| How you get cash | One lump sum at closing | Draw as needed during the draw period |
| Closing costs | Similar to a new mortgage, often several percent of the loan | Usually lower; some lenders charge a single origination fee |
| Monthly payments | One mortgage payment | Your mortgage payment plus a HELOC payment |
| Typical max loan-to-value | Set by loan program (see below) | Set by each lender's combined LTV limit |
How a cash-out refinance works
With a cash-out refinance, you take out a new mortgage that's larger than your current balance. The new loan pays off the old one, and you receive the difference, minus closing costs, in cash. Your new rate and term apply to the whole balance.
Hypothetical example: your home is worth $500,000 and you owe $250,000. A new $375,000 loan (75% LTV) pays off the old mortgage and gives you about $125,000 before closing costs.
Loan-to-value limits depend on the program:
| Program | Typical maximum cash-out LTV |
|---|---|
| Conventional (single-unit primary residence) | Generally 80% |
| FHA | Generally 80%; see the HUD Single Family Handbook |
| VA (eligible veterans and service members) | Up to 90% with the lenders we work with; see the VA cash-out refinance page |
Lenders may set lower limits based on credit, loan size and property type.
How a HELOC works
A HELOC is a revolving line of credit secured by your home that sits behind your existing mortgage. You draw what you need during the draw period, often paying interest only, then repay principal and interest during the repayment period. You pay interest only on what you've drawn. Learn more in our guides to HELOC requirements and the HELOC payment calculator.
Hypothetical example: same $500,000 home with a $250,000 mortgage. At an 85% combined LTV example, total loans could reach $425,000, so the HELOC limit could be up to about $175,000 while your first mortgage stays exactly as it is.
The rate question: why your current mortgage matters most
A cash-out refinance resets the rate on your entire mortgage. If you have a low rate today, replacing it can cost far more than the new cash is worth.
Hypothetical example for illustration only; rates are not quotes. A homeowner owes $250,000 at 3.5% (30-year) and needs $60,000.
| Option | What happens | Approximate monthly payments |
|---|---|---|
| Keep mortgage + HELOC | $250,000 stays at 3.5%; $60,000 HELOC at a hypothetical 9% over 20 years | About $1,123 (P&I on $250,000 at 3.5%) + $540 = about $1,663 |
| Cash-out refinance | New $310,000 30-year loan at a hypothetical 6.75% | About $2,011 |
In this example, the HELOC keeps the payment about $350 a month lower, even though the HELOC's rate is higher, because the low-rate first mortgage stays in place. The math can flip when your current rate is close to or above today's rates.
When a HELOC is usually better
- Your first-mortgage rate is lower than today's rates.
- You need a smaller amount compared with your mortgage balance.
- Your costs will be spread out over time, or you want a safety net.
- You want lower closing costs.
- You plan to repay the borrowed amount within a few years.
When a cash-out refinance is usually better
- Today's rates are near or below your current mortgage rate.
- You want a single loan and one payment.
- You want a fixed rate on everything, including the cash you take out.
- You're eligible for a VA cash-out refinance with a higher LTV limit.
- You want to change your loan term or remove mortgage insurance at the same time.
Costs to compare
| Cost | Cash-out refinance | HELOC |
|---|---|---|
| Origination / lender fees | Common | Varies; some charge one origination fee |
| Appraisal | Usually required (waivers exist) | Sometimes replaced by an automated valuation |
| Title insurance and escrow | Full lender's title policy | Often lower-cost title products |
| Program fees | FHA mortgage insurance; VA funding fee unless exempt | Possible annual or early-closure fees |
With some programs you can skip the in-person appraisal on a HELOC; see how a HELOC without an appraisal works. The FTC's guide to home equity loans and lines of credit lists questions to ask any lender.
Qualifying for a cash-out refinance vs a HELOC
| Factor | Cash-out refinance | HELOC |
|---|---|---|
| Credit score | Program and lender minimums; FHA and VA can be more flexible | Lender minimums; some programs work with scores in the 600s |
| Equity | Must stay within the program's max LTV after the cash-out | Must stay within the lender's max combined LTV |
| Income and DTI | Full income documentation and DTI review | Income and DTI review; some programs streamline documentation |
| Seasoning | Programs often require you to have owned the home or had the loan for a minimum time | Some lenders require a waiting period after a purchase or refinance |
| Home value | Usually a full appraisal | Appraisal or automated valuation |
Run a quick break-even check
To compare fairly, look at total cost over the time you expect to keep the loan, not just the monthly payment:
- Add up upfront costs for each option: closing costs, fees and any points.
- Compare monthly payments for the combination you'd actually have: mortgage + HELOC, or the single new mortgage.
- Multiply the payment difference by the number of months you expect to keep the loans.
- Add the upfront cost difference. The option with the lower total usually wins.
- Consider the balance left at the end of that period, since paying down principal faster builds equity.
Estimate each piece with our home equity calculator and HELOC payment calculator.
Timeline: how long each takes
| Step | Cash-out refinance | HELOC |
|---|---|---|
| Application and documents | Several days | A few days |
| Home valuation | Appraisal, often 1 to 2 weeks | Automated valuation can take minutes; appraisal 1 to 2 weeks |
| Underwriting and closing | Often 30 to 45 days total | Some programs fund in as few as five days after approval |
| Right to cancel | Three business days on a primary-home refinance with a new lender | Three business days on a primary home |
Common mistakes when choosing
- Comparing rates instead of total cost. A HELOC's higher rate on a small balance can cost less than a lower rate on your whole mortgage.
- Ignoring closing costs. Thousands in refinance costs can wipe out the benefit of a slightly lower rate.
- Forgetting the term reset. Starting a new 30-year loan can add years of payments even if the monthly amount looks affordable.
- Overlooking variable-rate risk. If you choose a HELOC, test a higher rate to make sure the payment still fits.
- Taking more cash than you need. Every extra dollar is secured by your home and adds interest.
- Getting only one quote. Rates, fees and limits differ between lenders, so compare several offers for both options before you decide.
What about a home equity loan?
A home equity loan sits between the two: it keeps your first mortgage like a HELOC, but pays one lump sum at a fixed rate like a cash-out refinance. Compare them in our HELOC vs home equity loan guide, or consider a fixed-rate HELOC.
Using the cash to consolidate debt
Both options are commonly used to pay off high-interest debt. Either way, you're moving unsecured debt onto your home, so the home is at risk if you can't make the payments. Read our guide to a home equity loan for debt consolidation before deciding.
Taxes
For both options, interest on the cash portion is generally deductible only if you itemize and use it to buy, build or substantially improve the home securing the loan. See IRS Publication 936 and consult a tax professional.
Frequently asked questions
Is it better to do a cash-out refinance or a HELOC?
If your current mortgage rate is low, a HELOC is usually better because it leaves that rate in place. If today's rates are similar to or lower than your current rate, or you want one loan, a cash-out refinance may be better.
Which has lower closing costs?
HELOCs usually have lower closing costs. A cash-out refinance is a full new mortgage, so costs are similar to a purchase or refinance loan.
How much cash can I get from a cash-out refinance?
It depends on the program. Conventional and FHA cash-out refinances are generally limited to 80% of your home's value, and VA cash-out refinances can go up to 90% with the lenders we work with, minus what you owe.
Can I get a HELOC after a cash-out refinance?
Yes, if you still have enough equity to stay under the HELOC lender's combined loan-to-value limit. Some lenders require a waiting period after a refinance.
Does a cash-out refinance restart my loan term?
Usually yes. The new mortgage has its own term, such as 30 or 15 years, starting from the new closing date.
Is a HELOC riskier than a cash-out refinance?
Both use your home as collateral. A variable-rate HELOC adds payment risk if rates rise, while a cash-out refinance can raise your total interest cost if it replaces a low rate.
Which is faster?
HELOCs are often faster, especially programs that use automated valuations. Cash-out refinances usually take several weeks because they're full mortgage loans.
Which is better for debt consolidation, a HELOC or a cash-out refinance?
If your current mortgage rate is low, a HELOC or home equity loan usually costs less because only the new money is at today's rate. If your mortgage rate is already high, rolling everything into one cash-out refinance may lower your total payments.
Can I do a cash-out refinance with bad credit?
Some programs, such as FHA and VA, can be more flexible on credit than conventional loans, though rates and limits depend on your score. Each lender also sets its own minimums.
Will a cash-out refinance lower my monthly payment?
Sometimes. If today's rate is lower than your current rate or you extend the term, your payment could drop even with the added cash. If rates are higher, your payment usually rises.
Can veterans use a VA cash-out refinance instead of a HELOC?
Yes. Eligible veterans can use a VA-backed cash-out refinance, which can allow a higher loan-to-value than conventional options. The VA funding fee may apply unless you're exempt.
Related guides and tools
Sources
- U.S. Department of Veterans Affairs: Cash-out refinance loan
- U.S. Department of Housing and Urban Development: Single Family Housing Policy Handbook 4000.1
- Consumer Financial Protection Bureau: What you should know about home equity lines of credit
- Federal Trade Commission: Home Equity Loans and Home Equity Lines of Credit
- Internal Revenue Service: Publication 936, Home Mortgage Interest Deduction