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HELOC vs. Home Equity Loan vs. Cash-Out Refinance

Three ways to turn home equity into cash. They differ in how the money arrives, how the rate behaves and what happens to the mortgage you already have. Here is how to choose, with worked numbers.

By the HomeOutlay team Updated 12 min read

The short answer

  • The rate on your first mortgage decides most cases. If it's well below today's 7.24% average, a second loan (HELOC or home equity loan) keeps that low rate. A cash-out refinance would reprice your whole balance.
  • HELOC: a variable-rate line you draw as needed, usually priced at the prime rate (7.00% on October 28, 2026) plus a margin. Best for costs spread over time.
  • Home equity loan: one lump sum at a fixed rate and a fixed payment. Best for one known cost.
  • Cash-out refinance: one new, bigger first mortgage. It makes sense mainly when the new rate is no higher than your current one. Expect closing costs of 3% to 6%.
  • All three put your home on the line. Lenders usually cap all your loans together at 80% to 90% of the home's value (80% for a conventional cash-out refinance).

Educational estimate, not financial advice. The examples below use national averages and our own assumptions. They are not rate quotes or offers of credit, and nothing here means you would be approved. Your home secures every option on this page: if you can't repay, you could lose it. Read each lender's disclosures and talk with a licensed lender, a HUD-approved housing counselor or a financial adviser before you borrow.

The three options at a glance

A home equity line of credit (HELOC) and a home equity loan are both second mortgages: your first mortgage stays exactly as it is, and the new debt sits behind it. A cash-out refinance pays off your first mortgage with a larger one and hands you the difference. The CFPB's HELOC booklet lays out the same comparison; here it is with typical numbers.

HELOC

Money
Draw as needed, repay, draw again
Rate
Usually variable: prime + margin
First mortgage
Untouched
Payments
Often interest-only during the draw, then higher
Upfront costs
Low to none at many lenders; watch annual and early-closure fees
Limit
Often 80% to 90% CLTV
Fits
A phased remodel, tuition by semester, a backup fund

Home equity loan

Money
One lump sum at closing
Rate
Usually fixed
First mortgage
Untouched
Payments
Same every month
Upfront costs
Often quoted at 2% to 5%; some lenders charge less
Limit
Often 80% to 90% CLTV
Fits
One known cost: a roof, a single project

Cash-out refinance

Money
One lump sum at closing
Rate
Fixed or adjustable
First mortgage
Replaced at today's rate
Payments
One mortgage payment
Upfront costs
3% to 6% of the whole new loan (Freddie Mac)
Limit
80% LTV (conventional, FHA)
Fits
Your current rate is at or above today's

CLTV, or combined loan-to-value, is every loan secured by the home divided by its appraised value. LTV is the same idea with only one loan.

The deciding question: what rate is on your first mortgage?

Comparing the rate of each new loan misses the point, because a cash-out refinance doesn't just price the new cash. It reprices everything you owe. The fair comparison is your blended rate: the average rate on all the debt against the home, weighted by balance.

Blended rate = (first balance × first rate + second balance × second rate) ÷ total balance

Both examples below use a $400,000 home and a homeowner who wants $50,000. The second-loan rates are the defaults of our HELOC calculator: a HELOC at prime plus 0.50% (7.50%) and a 15-year home equity loan at 8.76%, Bankrate's average for October 21, 2026. The cash-out refinance uses the Freddie Mac 30-year average of 7.24%, with 3% closing costs ($9,000) added to the loan. Lenders often price cash-out loans a little above that average, so this is a generous case for the refinance. For the home equity loan we assume $1,000 (2%) in closing costs, and none for the HELOC.

Example A: a $250,000 first mortgage at 4.00%, 25 years left

The current payment is $1,319.59 in principal and interest. Keeping it and adding a second loan gives a blended rate of about 4.6% to 4.8%. A cash-out refinance moves all $309,000 to 7.24%.

Total cost = interest left on every loan plus closing costs. Rates held steady for the whole term.
OptionMonthly payment, all loansTotal cost
Keep first + HELOC repaid over 15 years$1,783$179,309
Keep first + home equity loan, 15 years$1,820$186,881
Keep first + HELOC, 10 years interest-only then 20 years$1,632, then $1,722$230,049
Cash-out refi, 25 years (same payoff date)$2,231$369,445
Cash-out refi, new 30 years$2,106$458,099

With a low first-mortgage rate, the second loan wins by a wide margin: about $180,000 to $190,000 less in total cost than a cash-out refinance with the same payoff date. The interest-only HELOC is the most expensive of the second-loan choices, because it spends ten years paying nothing toward the $50,000.

Example B: a $250,000 first mortgage at 8.50%, 28 years left

Now the first mortgage itself is above today's average. The blended rate with a second loan is about 8.5%, higher than the 7.24% a cash-out refinance would charge on everything.

OptionMonthly payment, all loansTotal cost
Keep first + home equity loan, 15 years$2,453$447,252
Cash-out refi, 28 years (same payoff date)$2,149$422,087

Here the cash-out refinance lowers the payment by about $305 a month and the total by about $25,000. In effect, it's a rate-lowering refinance that also hands you cash. The edge is thinner than it looks, though: at a first-mortgage rate of about 8.05%, the two options cost about the same in total. That's because the refinance spreads the $50,000 over 28 years instead of 15.

See how much you could borrowYour home value, balance and lender limit, with HELOC and home equity loan payments side by side.

How much each option can give you

The limits work differently. With a second loan, the lender caps your combined debt. With a cash-out refinance, it caps the single new loan, and the closing costs come out of the same room. On the $400,000 home with $250,000 owed:

Option and limitAll loans up toCash available
HELOC or home equity loan, 80% CLTV$320,000$70,000
HELOC or home equity loan, 85% CLTV$340,000$90,000
HELOC or home equity loan, 90% CLTV$360,000$110,000
Conventional cash-out refi, 80% LTV$320,000about $60,000 after 3% costs

Lenders use their own appraisal or valuation model, not a listing site's estimate. They also check your credit, income and debt-to-income ratio. Fannie Mae generally requires the first mortgage being paid off in a cash-out refinance to be at least 12 months old, and FHA also caps cash-out at 80% of value. VA cash-out loans can go higher, set by the lender.

When a HELOC fits, and what can go wrong

A HELOC charges interest only on what you've drawn, so it suits costs that arrive in pieces: a remodel paid by the stage, tuition each semester, or a reserve you hope not to touch. Many lenders charge little or nothing to open one. The trade-offs:

  • The rate moves. It follows the prime rate. If prime rises 2 points, the interest-only payment on $50,000 at 7.50% goes from $312.50 to $395.83 a month. Your agreement must state a lifetime maximum rate.
  • The payment jumps when the draw ends. After a 10-year draw, $50,000 at 7.50% goes from $312.50 interest-only to $402.80 over 20 years. Some plans instead require a balloon payment of the whole balance.
  • The line can be frozen. The CFPB notes that lenders can generally freeze or reduce a line if your home's value falls or your finances get worse. Don't count on unused credit as your only emergency fund.
  • Fees hide in the fine print: annual fees, inactivity fees, transaction minimums, and early-closure fees if you close the line within the first two or three years. They often come with the lines that advertise no closing costs.
  • Teaser rates last six or twelve months, then reset to prime plus the margin. Compare offers at the full rate.

Some HELOCs let you convert part of the balance to a fixed rate. The CFPB says that fixed rate is typically higher than the variable one, but it can turn a finished project into a predictable payment.

When a home equity loan fits

A home equity loan is the simplest of the three: one amount, one fixed rate, one payment until it's gone. It suits a single cost you know up front, like a roof replacement or a kitchen with a signed contract. Our kitchen remodel cost calculator can help size the number before you apply.

The drawbacks: you pay interest on the full amount from day one, even if the contractor bills in stages, and if the project runs over you have to apply for more. Closing costs vary more than for HELOCs. Some lenders cover them, while others charge a few percent, so compare the Loan Estimates line by line.

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When a cash-out refinance fits

A cash-out refinance makes the most sense when you would refinance anyway: your current rate is at or above today's, or you want to change the term or drop FHA mortgage insurance. You end up with one loan, one payment and usually the lowest rate of the three, because a first mortgage carries less risk for the lender than a second one.

It costs the most to set up, because closing costs of 3% to 6% apply to the whole new loan, not just the cash. On the example's $309,000 loan, 3% is $9,000 to get $50,000. And unless you choose a term that matches your old payoff date, it restarts the clock on your mortgage. Our guide on when refinancing makes sense covers the break-even test, and the refinance calculator handles cash-out amounts.

Taxes: when the interest is deductible

Interest on any of the three can be deductible only if you itemize and the money is used to buy, build or substantially improve the home that secures the loan, according to IRS Publication 936. Money spent on a car, a vacation, tuition or credit card payoff doesn't qualify, no matter which kind of loan it came from. Total qualifying home debt counts against a $750,000 limit ($375,000 if married filing separately). The 2025 tax law made that limit and the home equity interest rule permanent. With a cash-out refinance, only the part that replaced your old balance or went into improvements counts. Keep receipts for the project, and ask a tax professional about your case.

Common mistakes, and when to get help

  • Refinancing a low rate to get a small amount of cash. In Example A, the refinance costs about $190,000 more than a second loan over the same payoff period.
  • Paying only interest on a HELOC for ten years. It's the cheapest monthly payment and the most expensive total. Set up a payment that clears the balance on a schedule you choose.
  • Turning unsecured debt into secured debt. Paying off credit cards with home equity can lower the rate, but it puts your home behind debt that couldn't take it before. If the cards fill up again, you're worse off.
  • Borrowing the maximum. Leaving equity untouched protects you if prices fall and you need to sell.
  • Getting one offer. Ask at least three lenders, including your bank or credit union, and compare the APR, margin, fees and draw terms.

You have a federal right to cancel a HELOC, home equity loan or refinance on your main home within three business days of opening it, and the lender must return the fees you paid. Use that window to reread the terms. A HUD-approved housing counselor can help you compare options for free or at low cost, and a tax professional can tell you whether the interest is deductible.

Common questions

Is a HELOC or a cash-out refinance better?

It depends mostly on the rate of your current mortgage. If it is well below today's rates, a HELOC or home equity loan keeps that low rate on most of your debt and usually costs far less. If your current rate is at or above today's, a cash-out refinance can lower the rate on everything and leave you with one payment.

Is a home equity loan the same as a second mortgage?

Yes. A home equity loan and a HELOC are both second mortgages: they are secured by your home and sit behind your first mortgage, which stays unchanged. If the home is sold or foreclosed, the first mortgage is paid before the second.

Which has lower closing costs, a HELOC or a home equity loan?

HELOCs often have low or no upfront costs, although some lenders charge an annual fee or an early-closure fee if you close the line within two or three years. Home equity loan costs are often quoted at 2 to 5 percent of the loan, and some lenders cover them. A cash-out refinance usually costs the most, 3 to 6 percent of the whole new loan.

Can I have a HELOC and a home equity loan at the same time?

Some lenders allow it, but every loan against the home counts toward the same combined loan-to-value limit, often 80 to 90 percent of the value. On a $400,000 home with $250,000 owed and an 85 percent limit, all new borrowing together cannot pass $90,000.

Does a cash-out refinance reset my mortgage?

Yes. It pays off your current loan and starts a new one at today's rate, with new closing costs. If you pick a new 30-year term, you also add years of payments. Choosing a term that matches your old payoff date keeps the schedule and lowers the total interest.

Can I lose my house with a HELOC?

Yes. A HELOC, a home equity loan and a cash-out refinance are all secured by your home, so the lender can foreclose if you stop paying. That is why it is worth borrowing less than the maximum and testing the payment at a higher rate before you sign.

Sources

Rates checked October 30, 2026. The worked examples are HomeOutlay calculations with standard amortization; the 8.76% home equity loan rate is Bankrate's 15-year average for October 21, 2026. The 0.50% HELOC margin is our estimate (Bankrate's 7.36% HELOC average works out to prime plus about 0.36%), and the closing costs sit at the low end of the published ranges: 2% for the home equity loan (often quoted at 2% to 5%) and 3% for the cash-out refinance (3% to 6%). None of these are quotes.

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