HELOC vs. Cash-Out Refinance: Your Existing Rate Decides It
The usual comparison is the HELOC rate against the refinance rate, plus a line about closing costs. Both miss the variable that decides most cases. A cash-out refinance does not just lend you the new money — it replaces your entire existing mortgage at today’s rate. If your current rate is low, the cost of the refinance is mostly the cost of giving that rate up.
- A cash-out refi reprices your whole balance. A HELOC or home equity loan prices only the new money and leaves your first mortgage alone.
- With a 3.5% first mortgage, taking $60,000 by cash-out refi costs about $48,000 more over five years than a HELOC. Closing costs are under a fifth of that gap.
- With a 7.5% first mortgage, the three options are within $700 of each other at five years, and the refinance edges ahead by year ten.
- An interest-only HELOC never pays itself down. Ten years in, you still owe the full $60,000 — and the payment rises when the draw period ends.
The three ways to get the cash
| Cash-out refinance | HELOC | Home equity loan | |
|---|---|---|---|
| What happens to your first mortgage | Paid off and replaced | Untouched | Untouched |
| Rate type | Usually fixed | Variable, tied to prime | Fixed |
| How you get the money | Lump sum at closing | Draw as needed | Lump sum at closing |
| Typical early payment | Fully amortizing | Often interest-only during the draw period | Fully amortizing |
| Closing costs | Full refinance costs, often 2–5% of the loan | Low, sometimes waived with conditions | Low to moderate |
The scenario
A homeowner owes $250,000 at 3.5% with 25 years left ($1,252/month P&I) and needs $60,000. Assumptions, all adjustable in our HELOC vs. cash-out calculator:
- Cash-out refi: new $310,000 loan at 6.875%, 30 years, 3% closing costs ($9,300) paid in cash.
- HELOC: $60,000 drawn at 7.5% (prime plus a margin), interest-only for a 10-year draw period, $750 in costs.
- Home equity loan: $60,000 at 8.25%, 15 years, $1,000 in costs.
Comparing monthly payments would be misleading here, because the payments buy different amounts of principal reduction. The fair comparison is total position: cash at closing + every payment made + every balance still owed, across all liens. Lower is better.
| Existing rate 3.5% | Monthly payment (all liens) | Total cost, 5 yrs | Total cost, 10 yrs |
|---|---|---|---|
| Cash-out refi | $2,036 | $422,903 | $518,908 |
| HELOC | $1,627 | $374,145 | $431,009 |
| Home equity loan | $1,834 | $374,278 | $424,648 |
The refinance loses by roughly $48,700 at five years and $88,000 at ten. Its $9,300 in closing costs explain a small part of that. The rest is $250,000 of debt that went from 3.5% to 6.875%.
Flip the existing rate and the answer flips
Same scenario, but the first mortgage is a 2023 loan at 7.5%:
| Existing rate 7.5% | Total cost, 5 yrs | Total cost, 10 yrs |
|---|---|---|
| Cash-out refi | $422,903 | $518,908 |
| HELOC | $423,430 | $526,741 |
| Home equity loan | $423,563 | $520,380 |
Now the refinance is effectively tied at five years and about $7,800 ahead of the HELOC at ten, because it also lowers the rate on the existing $250,000. This is the whole decision in one line: if your current rate is below today’s refinance rate, a second lien almost always wins; if it is above, the refinance is competitive or better. For more on what a low rate is worth, see the rate lock-in effect.
Why the HELOC’s balance never moved
In both scenarios the HELOC still shows $60,000 owed after ten years. That is not an error. An interest-only draw period means every payment is interest. The HELOC looks cheap month to month because it is not repaying anything. Two consequences:
- Comparing cumulative interest is wrong for HELOCs. It ignores the balance you still owe. That is why the comparison above adds remaining balances back in.
- The payment jumps when the draw ends. Here, $375/month interest-only becomes $483/month when the $60,000 starts amortizing over 20 years — or $559 if the rate has risen to 9.5% by then.
The variable-rate risk, priced
Re-running the 3.5% case with the HELOC rate rising two points (to 9.5%) from year three onward:
A two-point rise costs about $9,600 over ten years. It does not make the refinance competitive at a 3.5% starting rate — but it does make the fixed home equity loan the cheaper second lien. If you are borrowing for the long term and do not need to draw flexibly, the fixed second mortgage removes the rate bet at little cost. HELOCs typically have a lifetime rate cap but no annual cap, so read the note for the ceiling.
Taxes don’t favor one product
A common claim is that refinance interest is deductible and HELOC interest is not. Under current federal law, the test is the same for all three: interest on home-secured debt is deductible only if the money is used to buy, build, or substantially improve the home securing it, within the overall mortgage debt limit — and only if you itemize. Taking cash out to pay off credit cards produces non-deductible interest whichever product you use. A kitchen renovation can produce deductible interest whichever product you use. The tax question is about the use of the money, not the type of loan. Confirm your own situation with a tax preparer.
Risks the rate comparison doesn’t show
- Lines can be frozen or reduced. A HELOC lender can suspend or cut an undrawn line if your home value falls or your credit changes. In 2008–2009 many did. Don’t plan on undrawn HELOC money as an emergency fund for an emergency that may coincide with a downturn.
- A refinance restarts the clock. Moving 25 remaining years to a new 30-year term adds five years of payments. Matching the remaining term, or paying extra, changes the total materially.
- Both are secured by the house. Converting credit card debt into home-secured debt trades a lower rate for foreclosure risk. That is a real trade, not a free one.
- Future qualifying. A HELOC payment counts in your DTI if you apply for other credit, and some lenders qualify you on the full line rather than the drawn balance.