- A cash-out refinance reprices your entire balance at today’s rate. A HELOC prices only the cash you take. If your existing rate is low, that difference dominates everything else.
- The blended rate is a sanity check, not a decision. It ignores closing costs, mismatched terms, and the fact that an interest-only HELOC retires no principal.
- HELOC rates float. The breakeven rate in the output tells you how much room you have before the refinance becomes cheaper.
- If your holding period runs past the HELOC’s draw period, the payment steps up sharply. The tool includes that; most don’t.
Why the usual comparison gets this wrong
Most write-ups on this decision compute a blended rate — the weighted average of your mortgage rate and the HELOC rate — and compare it to the cash-out refinance rate. Lower blended rate wins. It’s a reasonable first cut and it’s in the output above for that reason.
It misses three things. Closing costs: a refinance typically costs several thousand dollars, a HELOC a few hundred, and a blended rate has nowhere to put that. Term mismatch: the refinance restarts a 30-year clock on the whole balance, while your existing loan may have far less time left; that changes how much principal you retire during your hold. And the draw period: a HELOC is usually interest-only for the first ten years, so its balance doesn’t move. A cumulative-interest comparison sees low HELOC interest and calls it cheap, without noticing you still owe every dollar of it.
Total cost handles all three by counting what you paid and what you still owe at the end of the holding period. The scoring-methods article walks through why that’s the only method that doesn’t systematically favor one side.
The default case, and why the gap is so large
$320,000 remaining at 3.25% with 24 years to go, pulling $60,000. Refinance at 6.75% over 30 years with $8,000 in costs rolled in, or keep the loan and take a HELOC at 8.5%, interest-only for ten years. Seven-year hold.
| Route | Payment (mo. 1) | Paid over 7 yrs | Still owed | Total cost |
|---|---|---|---|---|
| Cash-out refi at 6.75% | $2,517 | $211,391 | $352,255 | $563,646 |
| Keep 3.25% + HELOC at 8.5% | $2,030 | $170,536 | $311,280 | $481,815 |
HELOC route blended rate: 4.08%. Breakeven HELOC rate: roughly 28%.
The HELOC route wins by $81,831, and it isn’t close. The reason is arithmetic, not cleverness: the refinance moves $320,000 from 3.25% to 6.75%, which costs about $11,000 a year in extra interest on the balance you already had. The HELOC charges 8.5% on $60,000 — about $5,000 a year. Paying a higher rate on a fifth of the money beats paying a moderately higher rate on all of it, and it isn’t a near thing. This is the lock-in effect in a different costume.
The breakeven tells you how robust that is. The HELOC could reset to nearly 28% before the refinance caught up. No plausible rate path gets there. When the breakeven is that far away, the HELOC route is the answer; when it’s within a few points of today’s HELOC rate, the refinance’s fixed rate is buying real insurance and the decision is closer than the totals suggest.
When the refinance wins
Existing rate near today’s
If you’re at 6.5% and refi rates are 6.75%, repricing the balance costs almost nothing — and the HELOC’s higher rate on the cash is pure cost. The refinance usually wins here, especially with modest closing costs.
Large cash-out relative to balance
The HELOC’s advantage is pricing only the cash. When the cash is half your balance, that advantage shrinks and the refinance’s lower rate on the combined amount starts to matter.
Long hold past the draw period
After the draw period the HELOC amortizes over a shorter term at a higher rate. Over fifteen or twenty years that repayment phase can erase an early lead.
Rate exposure you can’t afford
A HELOC at 8.5% today can be 11% in two years. If a rise past the breakeven would strain the budget, the fixed refinance is worth its premium as insurance. The calculator can price the two routes; it can’t price your tolerance for the variable one.
What the draw period does to the payment
A HELOC’s interest-only phase makes the early payment look small. On the default case the HELOC adds about $429 a month to the existing $1,602 mortgage payment. When the draw period ends, the $60,500 balance amortizes over the repayment period at the HELOC rate — and the HELOC payment roughly amortizes up to $525 a month. Manageable here. On a larger draw, or a shorter repayment period, or a rate that has risen, the step-up can be several hundred dollars.
The calculator handles this: if your holding period runs past the draw period, the repayment-phase payments are in the totals and the note tells you the new payment. Set the hold honestly. A tool that assumes you refinance or sell before the draw period ends is answering a different question than the one you asked.
What this tool holds constant
The HELOC rate. In reality it’s a margin over prime and it moves. The breakeven output is the honest way to reason about that: it tells you the rate at which the two routes cost the same, and you judge how likely a move past it is over your hold. The tool also assumes closing costs are financed in both routes so the cash you receive is identical — if you’d pay the HELOC’s costs out of pocket, the difference is a few hundred dollars and doesn’t change the picture. It doesn’t model tax treatment, which differs between the two and depends on what the cash is used for; that’s a question for a tax professional, not a mortgage calculator.