HELOC vs. Cash-Out Refinance: Which Is Best for You?

Q: Can you have a HELOC and a mortgage at the same time?

Yes, absolutely. A HELOC is a second mortgage, meaning it's a separate loan that sits 'behind' your primary mortgage. You will have two separate monthly payments.

Your Home Is an Asset. Which Option Should You Use?

As a homeowner, you’ve likely heard that your property is more than just a place to live, it's a financial asset. The equity you’ve built is a powerful resource that can be used for home improvements, debt consolidation, or other major life expenses. But when it comes to accessing that value, you’re faced with a big question: is it better to use a home equity line of credit (HELOC) or a cash-out refinance?

Choosing the right option between a HELOC vs. refinance can save you thousands in interest and provide the financial flexibility you need. This guide breaks down the pros and cons of each, helping you make an informed decision.

Key Takeaways

»A HELOC is a flexible line of credit (like a credit card for your home), ideal for ongoing expenses. It's a second mortgage and usually has a variable rate.
»A Cash-Out Refinance replaces your existing mortgage with a new, larger one, giving you a lump sum of cash. It's best for large, one-time costs.
»Choose a HELOC if your current mortgage rate is very low (you don't want to lose it) and you want flexibility.
»Choose a Cash-Out Refinance if you need a large lump sum *and* you can also lower the interest rate on your primary mortgage.

What Is Home Equity & How Do I Build It?

Before you decide how to tap home equity, it’s essential to understand what it is. In short, your equity is the portion of your home you *actually* own. It's the key to your financial power as a homeowner.

Example: Your Home Equity

On a $450k home with a $250k mortgage.

The Formula: It’s simply your home’s current market value minus your remaining mortgage balance.
How It Grows: Your equity increases in two ways: 1) By paying down your mortgage principal each month, and 2) Through market appreciation (your home's value going up over time).

Option 1: The Cash-Out Refinance

A cash-out refinance involves replacing your current mortgage with a new, larger one. You receive the difference between the two loan amounts in cash. This is a powerful option, but it’s not always the right choice.

Best Use Case: It's ideal if you can also get a *lower interest rate* on your primary mortgage. This lets you get cash *while* reducing your long-term interest costs. It's a win-win.
The Catch: A refinance resets your loan term. If you’re 10 years into a 30-year mortgage, a new 30-year loan means you’ll be paying for 40 years in total (unless you get a shorter 15 or 20-year term).

💠 Want to see how much you could borrow?

Before you go further, find out exactly how much equity you can access.

Calculate Your Home Equity →

Option 2: The Home Equity Line of Credit (HELOC)

A HELOC is a "second mortgage" that acts like a credit card secured by your house. You get a credit limit (e.g., $80,000) and can draw money from it as needed, usually for a period of 5-10 years (the "draw period").

Best Use Case: It's perfect for ongoing projects with unknown costs (like a kitchen remodel) or as a "just-in-case" emergency fund. You only pay interest on the amount you actually use.
The Catch: Most HELOCs have a variable interest rate, meaning your payment can change. Also, after the draw period ends, you must pay back the principal (often over a 15-20 year term), which can increase your payment.

HELOC vs. Refinance: Side-by-Side Comparison

Let's break down the core differences between a cash-out refinance vs. home equity loan (specifically a HELOC) to make the choice clearer.

How You Access Your Funds

Feature	HELOC	Cash-Out Refinance
Loan Type	A second, separate mortgage (like a credit card for your house).	A brand new primary mortgage that replaces your old one.
Interest Rate	Typically variable and tied to the prime rate.	Typically fixed for the life of the new loan.
How You Get Funds	Draw what you need, when you need it, up to your credit limit.	Receive a single lump-sum payment at closing.
Best For...	Ongoing projects with uncertain costs (e.g., renovations) or as an emergency fund.	Large, one-time expenses (e.g., debt consolidation) and when current mortgage rates are low.

HELOC

Loan Type: A second, separate mortgage.

Interest Rate: Typically variable.

How You Get Funds: Draw as needed, like a credit card.

Best For: Ongoing projects or an emergency fund.

Cash-Out Refinance

Loan Type: A brand new primary mortgage.

Interest Rate: Typically fixed.

How You Get Funds: A single lump-sum payment.

Best For: Large, one-time expenses.

Example Scenarios: Putting It into Practice

Let’s look at two common situations to see where each option shines. Assume a homeowner has a $450k home and a $250k mortgage, giving them access to about $132,500 in equity.

Scenario 1: The Kitchen Remodel

Goal: $50,000 for a renovation project.

A HELOC is likely better here. It provides the flexibility to draw funds as different phases of the project need payment, and you only pay interest on what you use.

Scenario 2: High-Interest Debt

Goal: $40,000 to pay off credit cards.

A Cash-Out Refinance could be superior, especially if today’s mortgage rates are lower than your current one. You consolidate debt into a low, fixed-rate payment.

💠 Could a refinance lower your overall rate?

Use our calculator to see if refinancing could save you money in the long run.

Compare Refinance Savings →

How to Choose the Right Option for You

Still undecided? Answer these three questions to find your answer:

How will you use the money? For ongoing, flexible spending, choose a HELOC. For a single, large expense, a cash-out refinance is cleaner.
What are current interest rates? If rates are lower than your current mortgage, a cash-out refinance is very attractive. If rates are higher, a HELOC is better as it leaves your low-rate primary mortgage untouched.
How comfortable are you with variable rates? If the thought of a fluctuating payment makes you nervous, the fixed rate of a cash-out refinance offers more peace of mind than typical HELOC interest rates.

Frequently Asked Questions (FAQ)

Is it better to refinance or get a home equity loan/HELOC?

It depends on your goal. A home equity line of credit (HELOC) is often better for flexible, ongoing expenses, while a cash-out refinance is better for large, one-time costs, especially if you can also lower your primary mortgage rate in the process.

Can you have a HELOC and a mortgage at the same time?

Yes, absolutely. A HELOC is a "second mortgage," meaning it's a separate loan that sits 'behind' your primary mortgage. You will have two separate monthly payments.

Does a HELOC affect your mortgage interest rate?

No, a HELOC does not change the terms of your existing mortgage. Your primary mortgage's interest rate and payment will remain the same. The HELOC will have its own separate interest rate, which is typically variable.

How much equity do I need to qualify for a HELOC?

Most lenders require you to retain at least 15-20% equity in your home after taking out the HELOC. This means your combined loan-to-value (LTV) ratio (your mortgage balance plus your potential HELOC) should not exceed 80-85% of your home's value.

Is home equity taxable income?

No, the cash you receive from a HELOC or cash-out refinance is not considered taxable income. It is a loan that you are borrowing against your own asset, so you do not need to report it to the IRS.