Key Takeaways
- A cash-out refinance replaces your entire existing mortgage with a new loan, while a HELOC adds a second mortgage on top of your first mortgage.
- If your current mortgage rate is higher than today’s rates, refinancing may be the better option. If you already have a low rate, a HELOC lets you keep it.
- HELOCs usually have variable interest rates and a draw period, while a cash-out refinance typically offers a fixed rate.
- Both options have closing costs, credit score impacts, and risks you should understand before committing.
- Use Wirly’s break-even calculator to see how long it takes to recoup costs for either option.
If you need to access the equity in your home, your two most common options are a cash-out refinance or a home equity line of credit (HELOC). The right choice depends mainly on your current mortgage rate, how much money you need, and how you plan to use it.
In short, a cash-out refinance makes more sense when you can lower your interest rate at the same time. A HELOC is often the better option when you already have a favorable rate on your first mortgage and do not want to replace it. Below, we break down exactly how each works so you can make a confident decision.
What Is a Cash-Out Refinance?
A cash-out refinance replaces your current mortgage with a new mortgage for a larger amount than you currently owe. You receive the difference in cash. For example, if you owe $200,000 on your existing mortgage and your home is worth $350,000, you might take out a new loan for $250,000 and receive $50,000 in cash (minus closing costs).
Because this is an entirely new loan, you go through a full mortgage application process. Your original mortgage is paid off and closed, and you start making a single monthly mortgage payment on the new mortgage.
What Is a Home Equity Line of Credit (HELOC)?
A HELOC is a revolving line of credit secured by your home equity. According to the Consumer Financial Protection Bureau, a HELOC works similarly to a credit card – you can borrow, repay, and borrow again up to your approved limit. If you already have a mortgage, the HELOC is considered a second mortgage that you pay in addition to your first mortgage.
HELOCs have a draw period – typically 5 to 10 years – during which you can access funds and may only need to make interest payments. After the draw period ends, you enter a repayment period where you pay back both principal and interest.
Cash-Out Refinance vs. HELOC: Side-by-Side Comparison
How You Receive Your Funds
- Cash-out refinance: You receive a lump sum at closing.
- HELOC: You draw funds as needed during the draw period, similar to a credit card.
Interest Rates
- Cash-out refinance: Typically comes with a fixed rate, which means your monthly payment stays the same over the life of the loan.
- HELOC: Usually has a variable (adjustable) interest rate. According to the CFPB, HELOC payments will vary depending on the outstanding balance and rate changes. Some lenders offer a fixed rate option on portions of the balance.
According to Freddie Mac’s Primary Mortgage Market Survey, 30-year fixed mortgage rates have fluctuated significantly over recent years. When the mortgage rate environment is favorable, locking in a fixed rate through refinancing can provide long-term payment stability.
Loan Terms
- Cash-out refinance: Common terms are 15 or 30 years. You restart the amortization clock on your entire loan balance.
- HELOC: Typically a 5 to 10 year draw period followed by a 10 to 20 year repayment period. Your first mortgage terms remain unchanged.
Closing Costs
- Cash-out refinance: Closing costs typically range from 2% to 5% of the total new loan amount. Since the loan covers your full mortgage balance plus the cash-out amount, these costs can be substantial.
- HELOC: Closing costs are generally lower, and some lenders waive them entirely. However, you may face annual fees or early termination fees.
You can estimate the total cost impact of either option using Wirly’s refinance calculator.
Comparing Pros and Cons of Cash-Out Refinancing and HELOCs
Cash-Out Refinance Pros
- One monthly payment instead of managing two loans
- Potentially lower interest rate than a HELOC since it is a first mortgage
- Fixed rate provides predictable payments
- Good option if your current mortgage rate is above today’s rates
Cash-Out Refinance Cons
- Higher closing costs since you refinance the entire mortgage balance
- Restarts your loan amortization, which can mean paying more interest over time
- Longer approval process
- Does not make sense if your current mortgage rate is already low
HELOC Pros
- Keeps your existing mortgage and its rate intact
- Borrow only what you need, when you need it
- Lower or no closing costs
- Flexible for ongoing expenses like home improvements
HELOC Cons
- Variable interest rate means your monthly payment can increase
- Adds a second mortgage payment on top of your first mortgage
- Temptation to overborrow during the draw period
- Payment can jump significantly when the draw period ends
What About Home Equity Loans?
A home equity loan is a third option worth mentioning. According to the CFPB, a home equity loan provides a lump sum at a fixed or adjustable interest rate, and like a HELOC, it is considered a second mortgage if you still have a first mortgage. The key difference from a HELOC is that you receive all the funds upfront and repay them in fixed monthly installments.
A home equity loan can be a good middle ground if you want a predictable fixed rate payment (like a cash-out refinance) but do not want to replace your current mortgage (like a HELOC).
How to Choose Between a Cash-Out Refinance and a HELOC
Consider a cash-out refinance if:
- Your current mortgage has a higher interest rate than what you can get today
- You want one predictable monthly mortgage payment
- You need a large, one-time lump sum
- You prefer a fixed rate for long-term budgeting
Consider a HELOC if:
- You already locked in a low rate on your existing mortgage and want to keep it
- You need flexible access to funds over time (for example, phased home improvements)
- You want to minimize closing costs
- You are comfortable managing a variable interest rate
Compare current offers from multiple lenders. Wirly’s best refinance lenders page can help you research options side by side.
Risks and Considerations
This section is important. Both a cash-out refinance and a HELOC put your home at risk because your home serves as collateral. If you cannot make payments, you could face foreclosure.
- Break-even timing: Closing costs on a cash-out refinance can take years to recoup. If you plan to move soon, refinancing may not make sense. Use our break-even calculator to check.
- Amortization reset: A cash-out refinance restarts your loan clock. If you are 10 years into a 30-year mortgage and refinance into a new 30-year loan, you have added 10 years of payments and potentially thousands in additional interest.
- Hidden costs: Watch for appraisal fees, title insurance, origination fees, and prepayment penalties on your current mortgage.
- Credit score impact: Both options require a hard credit inquiry, which can temporarily lower your credit score. Applying with multiple lenders within a short window (typically 14 to 45 days) usually counts as a single inquiry for scoring purposes.
- Rate lock risks: If you are refinancing, your rate lock could expire before closing. Ask your lender about lock periods and float-down options.
- HELOC payment shock: When the draw period ends and you enter repayment, your monthly payment can increase dramatically.
According to 2024 CFPB complaint data, “trouble during the payment process” is consistently the most common mortgage-related complaint across major servicers, followed by “struggling to pay mortgage.” Before taking on additional debt through either option, make sure you can comfortably handle the new payment obligations. The CFPB recommends contacting a HUD-approved housing counselor at (855) 411-CFPB (2372) if you are having trouble paying your mortgage.
Frequently Asked Questions
Is it better to refinance or take out a HELOC?
It depends on your current mortgage rate. If you can get a lower rate by refinancing, a cash-out refinance may save you money overall. If you already have a low rate, a HELOC lets you tap your home equity without disturbing your favorable first mortgage terms.
Does a refinance or HELOC affect your credit score more?
Both require hard credit inquiries that temporarily lower your score. A cash-out refinance replaces your existing mortgage with a new loan, so it changes your credit profile in one way. A HELOC adds a new revolving account. The long-term impact depends on how responsibly you manage payments on either option.
Can you have a HELOC and refinance at the same time?
Technically, you can have both, but an existing HELOC can complicate a refinance. The HELOC lender holds a lien on your home, and they must agree to subordinate (move behind) the new first mortgage. This is not always guaranteed and can delay closing.
Which has lower closing costs – a refinance or a HELOC?
HELOCs generally have lower closing costs than a full cash-out refinance. Some HELOC lenders waive closing costs entirely, though they may charge annual fees or early closure penalties. A cash-out refinance involves closing costs on the entire new loan amount, which is typically much larger.
Is a HELOC the same as a home equity loan?
No. According to the CFPB, a home equity loan provides a one-time lump sum, while a HELOC is a revolving line of credit you can draw from repeatedly during the draw period. Both are considered second mortgages if you have an existing first mortgage.
The Bottom Line
Choosing between a cash-out refinance and a HELOC comes down to your current mortgage rate, how much flexibility you need, and your comfort with variable rates. Neither option is universally better – the right choice depends entirely on your financial situation. Take time to compare offers, calculate your break-even point, and consider the risks before making a decision.
Disclaimer: This article is for educational purposes only and does not constitute financial advice. Wirly is not a lender or mortgage broker. Consult with a qualified financial professional before making any mortgage decisions.
Sources
- Consumer Financial Protection Bureau (CFPB) – Guidance on the difference between home equity loans and HELOCs, last reviewed January 2, 2025
- CFPB Consumer Complaint Database – 2024 mortgage complaint data by servicer and issue type
- Freddie Mac Primary Mortgage Market Survey – Historical and current mortgage rate data
Sources
- CFPB (Consumer Financial Protection Bureau) – Official consumer protection guidelines and mortgage resources
- Freddie Mac Primary Mortgage Market Survey – Weekly benchmark mortgage rate survey dating to 1971
Written by the Wirly Editorial Team. Last reviewed: March 29, 2026. Fact-checked against CFPB guidelines (January 2025), CFPB complaint data 2024, Freddie Mac PMMS. See our methodology for how we evaluate lenders.