HELOC vs. Cash-Out Refinance: Which One Is Right for You?
Both a HELOC and a cash-out refinance let you convert equity into usable funds — but they're structured so differently that picking the wrong one can cost tens of thousands over time.
This breakdown covers the seven decisions that actually drive the choice.
How each one works
A HELOC is a revolving line of credit secured by your home. You're approved for a maximum amount (usually up to 85% combined loan-to-value), then you draw and repay during a 10-year draw period, followed by a 20-year repayment period. The rate is variable.
A cash-out refinance replaces your current mortgage with a new, larger one (up to 80% loan-to-value) and gives you the difference in cash. The rate is fixed (or whatever you choose), and you have a new 15–30 year term.
Cost: closing costs and rates
HELOCs typically have low or no closing costs ($0–$500), variable rates that move with prime, and interest-only payments during the draw period. Cash-out refinances have full closing costs (2–4% of the new loan) and a fixed rate locked for the life of the loan.
When a HELOC wins
You need flexible access to funds over several years (e.g. phased renovations, ongoing tuition).
Your current first mortgage has a great rate you don't want to lose.
You only need a portion of your equity and want to pay interest only on what you actually use.
When a cash-out refinance wins
You need a large lump sum (debt consolidation, major renovation, investment property down payment).
Current refinance rates are at or below your existing mortgage rate.
You want a fixed, predictable payment and don't want to worry about variable rates.
Frequently asked questions
Can I have both a HELOC and a cash-out refinance?
Yes, but combined loan-to-value caps still apply — usually 80–85% across both.
Is HELOC interest tax-deductible?
Only when the funds are used to buy, build, or substantially improve the home that secures the loan. Always confirm with a tax professional.
What credit score do I need?
Most lenders want 680+ for HELOC and 620+ for cash-out refinance, with the best terms at 740+.