Should I get a HELOC or refinance?

HELOC vs Cash-Out Refinance: Complete Comparison

Both options let you tap your home equity, but they work very differently. The right choice depends on your current mortgage rate, how much you need, and your repayment timeline.

How Each Option Works

HELOC (Home Equity Line of Credit):

• Second loan against your home equity
• Keeps your existing mortgage intact
• Variable interest rate (typically)
• Draw period (5-10 years) + repayment period (10-20 years)
• Use what you need, when you need it
• Closing costs: $0-2,000

Cash-Out Refinance:

• Replaces your existing mortgage with a new, larger one
• Difference between new and old mortgage given as cash
• Fixed or variable rate available
• New 15-30 year term begins
• Lump sum at closing
• Closing costs: 2-5% of loan amount

The Critical Question: Your Current Mortgage Rate

This single factor often determines the winner:

Example:

• Current mortgage: $280,000 at 3.5%
• Today’s refinance rate: 7%
• If you refinance, your whole mortgage is now at 7%
• That’s paying 3.5% MORE on $280,000
• Don’t give up a low rate—use HELOC instead

Cost Comparison

HELOC costs:

Cash-out refinance costs:

On a $330,000 refinance (existing $280,000 + $50,000 cash out):

• Closing costs: $6,600-16,500
• HELOC closing costs: $0-2,000
• Upfront cost difference: $5,000-15,000+

Total Cost Scenarios

Scenario: Need $50,000 for renovation

Current mortgage: $280,000 at 3.5%, 25 years remaining Home value: $450,000

HELOC Option:

• Keep mortgage: $280,000 at 3.5% = $1,404/month (existing payment)
• HELOC $50,000 at 9% for 10 years = $633/month
• Total monthly: $2,037
• Total interest on HELOC over 10 years: ~$26,000
• Closing costs: $500
• Total cost of HELOC: ~$26,500

Cash-Out Refinance Option:

• New mortgage: $330,000 at 7% for 30 years = $2,196/month
• Monthly increase: +$792
• Total interest over 30 years: ~$462,000 (vs ~$168,000 remaining on old loan)
• Extra interest: ~$294,000 (!)
• Closing costs: $10,000
• Total cost of refinance: ~$304,000 (over full term)

Winner: HELOC by a landslide (if you have a low existing rate)

When the Math Flips

Scenario: High current rate

Current mortgage: $280,000 at 7.5% Home value: $450,000

HELOC Option:

• Keep mortgage: $280,000 at 7.5% = $1,958/month
• HELOC $50,000 at 9% for 10 years = $633/month
• Total monthly: $2,591

Cash-Out Refinance Option:

• New mortgage: $330,000 at 7% for 30 years = $2,196/month
• Lower than HELOC option!
• Plus you locked in a slightly better rate on everything
• Closing costs: $10,000

Winner: Refinance (because you’re improving your rate too)

The Flexibility Factor

HELOC advantages:

• Draw only what you need
• Pay interest only on what you borrow
• Reuse as you pay down (revolving)
• Good for uncertain expenses (renovation phases)
• Quick access when opportunities arise

Cash-out refinance advantages:

• One predictable payment
• Fixed rate option (rate certainty)
• Potentially lower blended rate
• Forces budgeting (can’t reborrow)

Risk Comparison

HELOC risks:

Cash-out refinance risks:

Break-Even on Refinance Closing Costs

How long until closing costs pay off?

If refinance closing costs = $10,000 And monthly savings vs HELOC = $200

Break-even = Closing costs ÷ Monthly savings
Break-even = $10,000 ÷ $200 = 50 months (4.2 years)

If you’ll move or refinance again within 4 years, HELOC wins.

Tax Considerations

HELOC interest deductibility:

• Deductible IF used for home improvement
• Not deductible if used for debt consolidation, education, etc.
• Limit: Interest on up to $750,000 total mortgage debt

Cash-out refinance deductibility:

• Same rules apply
• Deductible portion depends on use of funds
• Consult tax professional for your situation

Decision Flowchart

Is your current mortgage rate lower than today's rates?
├── Yes (by 1%+) → HELOC (keep that low rate)
│   └── Unless you need $100k+ and will repay over 20+ years
│
└── No (rates are same or lower now) → Consider Refinance
    └── Calculate: Will savings exceed closing costs before you move?
        ├── Yes → Refinance
        └── No → HELOC or home equity loan

The Hybrid Consideration

You’re not limited to one:

Some homeowners do both strategically:

• Cash-out refinance for a large, known expense
• HELOC for ongoing flexibility/emergency access

Just ensure total borrowing doesn’t exceed 80-85% of home value.

Questions to Ask Lenders

For HELOC:

• What’s the initial APR and margin over prime?
• Any rate caps (floor or ceiling)?
• Draw period and repayment period length?
• Annual fees or inactivity fees?
• Can the line be frozen or reduced?

For Refinance:

• What’s the rate for my credit score and LTV?
• Total closing costs (get itemized)?
• Any points being charged?
• Can I roll closing costs into loan?
• Lock period and rate float-down option?

The Bottom Line

The biggest factor is your current mortgage rate.

Don’t sacrifice a great mortgage rate for cash-out convenience. A 3% mortgage is an asset worth protecting—use HELOC for cash needs instead.

Run the numbers for YOUR specific situation. The difference can be tens of thousands of dollars.

About This Calculator

Interest rates reflect market conditions as of late 2024/early 2025 and will change. Closing costs vary by lender, location, and loan amount. Tax deductibility rules simplified—consult a tax professional. Individual circumstances vary significantly. Last updated January 2025.