Cash-Out Refinance vs HELOC vs Home Equity Loan

Three instruments, one question: how do you get at equity without giving up something more valuable?

Cash-out refinance

Replaces your existing mortgage with a larger one; you take the difference in cash.

Good: single payment, fixed rate available, generally the lowest rate of the three, potentially deductible interest if used to improve the home.

Bad: you surrender your existing rate on the entire balance. Full closing costs — 2–5%. Usually resets amortization.

HELOC

A revolving credit line secured by the property, sitting behind your first mortgage. Draw period typically ten years, then repayment.

Good: your first mortgage is untouched. You pay interest only on what you draw. Low or no closing costs. Reusable.

Bad: variable rate, usually prime plus a margin. Payment jumps when the draw period ends. Lender can reduce or freeze the line.

Home equity loan (fixed second)

A lump sum at a fixed rate, as a second lien.

Good: first mortgage untouched, fixed rate, predictable payment.

Bad: higher rate than a first mortgage, interest on the whole sum from day one, less flexible than a line.

The question that decides it

How does your current first-mortgage rate compare to today’s market?

Say you hold $300,000 at 3.25% and want $100,000.

Cash-out refinance at 6.75%: you now pay 6.75% on $400,000. Your payment rises from roughly $1,306 to $2,594 — an increase of $1,288 for $100,000 of cash. You surrendered a 3.25% rate on $300,000 you had already borrowed cheaply.

HELOC at 8%: your first mortgage stays at 3.25%. The $100,000 draw costs about $667 a month interest-only. Total outlay roughly $1,973.

The HELOC is dramatically better here despite the higher headline rate — because it does not contaminate the cheap debt.

Now reverse it. If your existing rate is 7.5% and market is 6.5%, cash-out refinancing improves the rate on the whole balance and provides cash. Then it clearly wins.

Quick guide

• Existing rate well below market → HELOC or fixed second
• Existing rate at or above market → cash-out refinance
• Need funds in stages (renovation, sequential acquisitions) → HELOC
• Need a fixed sum, want certainty → fixed second or cash-out
• Short-term need, repaying soon → HELOC

Points people miss

• HCLTV. An undrawn HELOC still counts against you at its full limit when you next apply for financing.
• Cash-out LTV limits are lower than rate-and-term — commonly 80% on primary, less on investment.
• Cash-out rates carry an adjustment above rate-and-term pricing.
• Interest deductibility generally requires the funds be used to buy, build or substantially improve the home securing the debt. Consult a tax adviser.

Common questions