Cash Out Refinance vs HELOC: What’s the difference?

Should I get a cash out refinance or HELOC?

A cash out refinance or HELOC (home equity line of credit) lets homeowners turn some of their “equity” into cash. But when you’re choosing between them, you’ll need to consider the specifics of your personal finances to determine which type of loan is right for you.

Check your cash-out refinance interest rates. Start here (Nov 2nd, 2026)

How does a HELOC differ from a cash out refinance?

HELOCs, home equity loans and cash out refinances all let you get your hands on cash that’s currently tied up in your home.

HELOCs and home equity loans are second mortgages. In other words, you borrow and repay them in parallel with your original mortgage. And that means two monthly mortgage payments.

However, a refinance involves swapping your current mortgage for a completely new one.

Read on to discover the detailed differences in costs and characteristics that can make any of them the best in different circumstances.

Different options for tapping home equity

What is a cash out refinance?

You get a whole new mortgage. But you borrow more than you’d need just to replace your existing one and you receive a check for the difference.

What is a HELOC?

It’s a second mortgage that complements your first mortgage rather than replacing it. You get a line of credit, similar to the one you get with a credit card. So you can borrow, repay, and borrow again up to your credit limit. And you pay interest only on your outstanding balance.

What is a home equity loan?

This, too, is a second mortgage. But, instead of getting a line of credit, you receive a lump sum, which you pay down in equal installments.

Check your cash-out refinance interest rates. Start here (Nov 2nd, 2026)

What’s the difference between a HELOC and a home equity loan (HEL)?

We just covered the main differences. But there are others:

1. HELOCs usually have variable interest rates while HELs usually have fixed ones. So you run the risk of rising rates with a HELOC.
2. HELOCs tend to have lower interest rates than HELs. But your personal creditworthiness and financial health may influence your rates even more.
3. HELs are straightforward installment loans. You pay them down in equal installments.
4. HELOCs come in two phases. The draw period is when you can borrow, repay, and reborrow. But then comes the repayment period, during which you can’t borrow anymore. You must pay it off little by little via monthly payments, or refinance it into another loan.

Home equity loan, HELOC or cash out refinance: Which is best?

Which is best has as much to do with your needs as each mortgage loan’s characteristics. Pick the one that meets your requirements best, bearing in mind the six factors below.

Six factors to weigh before you choose

1. The mortgage rates. Typically, cash out refinances have the lowest rates, followed by HELOCs and then HELs.
2. The closing costs. This time, cash out refinances are usually most costly, followed by HELs and then HELOCs. Run the numbers to see which combination of rates and costs suits you best.
3. How much you want to borrow. Conventional and FHA cash out refinances are generally capped at 80% of your home’s value, and VA allows up to 100%. For HELs and HELOCs, each lender sets its own limit, which includes your first mortgage balance. But cash out refinances and HELs provide a lump sum while HELOCs let you draw from a line of credit.
4. What you’ll do with the money. HELs and refinances are best for lump sums. But HELOCs are great for freelancers, contractors and others in the gig economy. You can borrow in lean months, repay in good months and borrow again when times turn hard. HELOCs also suit those who want large sums for a short time. You only pay interest on the outstanding balance.
5. How long you plan to stay in your home. The sooner you’ll move, the more you’ll want to keep closing costs low. They’ll be wasted when you sell and get a new mortgage. So a HELOC, with its low or zero closing costs, may be better in that case.
6. Your risk tolerance for rising interest rates. If you opt for a HELOC, which usually has a variable rate, you’ll be on the hook if rates rise. HELOCs are usually based on the prime rate, which went from 3.25% in early 2022 to 8.50% by mid-2023. Your rate is prime plus the lender’s margin. Make sure you can still afford a rate that goes up 2 to 3 percentage points in coming years.

Exceptions to these general patterns

Of course, we’re talking generalities here. For example, you can find HELs with variable rates. And you could choose an adjustable-rate mortgage (ARM) for your cash out refinance.

Check your cash-out refinance interest rates. Start here (Nov 2nd, 2026)

Pros and cons of a cash out refinance

Pros of a cash out refinance

Why might you choose a cash out refinance rather than a HELOC or HEL? Well, there are several possible reasons:

1. Lower mortgage rates. These refinances typically have lower interest rates than home equity loans and HELOCs, though some HELOC rates come close.
2. More flexibility. You can choose the type of mortgage that suits you: conventional, FHA, VA, jumbo. But you can’t do a cash out refinance on a USDA loan.
3. Lower monthly payments. You can spread payments over 30 years, which is a longer loan term than most home equity loans or lines of credit. The more payments, the lower each needs to be. Home equity loans can also last up to 30 years but they’re usually for a shorter period of time. A HELOC has a draw period, often 10 years, followed by a repayment period that often runs 10 to 20 years.

Those are compelling advantages for many borrowers. But here are the drawbacks.

Cons of a cash out refinance

Cash out refinancings have some disadvantages you should take seriously:

1. You’re resetting the clock on your mortgage balance. Suppose you’ve had your existing 30-year mortgage for 10 years. Get a 30-year cash out refinance and you’ll be paying down your home for 40 years: the 10 you’ve already done and the 30 on the new loan. If you can afford the payments, opt for a 15- or 20-year term.
2. You may pay more in the end. Even with a lower interest rate, borrowing (and paying interest) for so long is expensive. Your total cost of borrowing will likely be lower with a shorter home equity product. Unless, that is, you can afford the higher payments that come with a 10-year, 15-year or 20-year cash out refinance.
3. Closing costs are higher than for home equity products. If you plan to move in the next few years, those higher costs could make a cash out refinance too expensive.
4. Your new loan could have a higher rate than your existing one. That’s likely if you got your mortgage before rates rose in 2022. A cash out refinance replaces your whole loan at today’s rate, so you could give up a low rate on your entire balance to get cash. Cash out refinances also often have slightly higher rates than straight refinances.
5. You might have to pay mortgage insurance. A conventional cash out refinance is usually limited to 80% of your home’s value, so it generally has no mortgage insurance. An FHA cash out refinance is also limited to 80%, but it still carries FHA mortgage insurance: an upfront premium and an annual premium.

Cash out refinances remain a very popular way to get cash from the value of your home.

Pros and cons of home equity lines of credit (HELOCs)

Although HELOCs and cash out refinances both let you access money that’s tied up in your home, they’re typically used for very different purposes. So let’s look at the tradeoffs:

Pros of home equity lines of credit (HELOCs)

For the right borrower, HELOCs have some impressive advantages:

1. Typically lower closing costs than a cash out refinance or home equity loan. Sometimes those costs are zero. The lower upfront costs could make a HELOC a good option, even if you intend to move in a year or two.
2. May be eligible for tax deductions on your interest payments. But only if you use the money to buy, build or substantially improve the home that secures the loan.
3. Low rates. Typically appreciably lower than for a HEL. Sometimes these rival cash out refinance rates.
4. Borrow large amounts. This depends on the amount of equity but you’re likely able to borrow much more than with a credit card or personal loan.
5. Flexibility. Borrow, repay and borrow again at will up to your credit limit. And only pay interest on your balances. Great for those with constantly changing incomes. And for those who want to borrow big sums for short periods.

Cons of home equity lines of credit (HELOCs)

So what should you be wary of? Here are some potential drawbacks:

1. Higher interest rates. Not all HELOC rates can compete with refinance ones.
2. Shorter terms. The draw period of a HELOC is often about 10 years, and repayment often takes 10 to 20 years. Monthly payments are often significantly higher once repayment begins, so the payment can be higher than on a 30-year cash out refinance.
3. Two mortgage payments. This applies to HELOCs and HELs, which are both in addition to your primary mortgage. A second mortgage means a second monthly payment.
4. Variable interest rates. Rates can move up as well as down. The prime rate more than doubled between early 2022 and mid-2023. If that happens again when you have a HELOC, your loan could become high-interest debt and you’ll have to pay more and make higher monthly payments.
5. Repayment periods. After a set number of years, your draw period will end and your repayment one begins. Some borrowers experience difficulties at that point. They can’t borrow anymore and they have a fixed time within which to pay down their balance. Unless they can refinance the loan amount.

In the end, the choice between a cash out refinance and a HELOC depends on the specifics of your financial circumstances.

Check your cash-out refinance interest rates. Start here (Nov 2nd, 2026)