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HELOC vs. cash-out refinance: which one to use
A cash-out refinance replaces your whole mortgage at today's rate. A HELOC leaves it alone and adds a second loan. The first-mortgage rate usually decides it.
01The difference in one sentence
A cash-out refinance pays off your existing mortgage with a new, larger one and hands you the difference. A HELOC leaves the existing mortgage in place and adds a second loan behind it. Everything else follows from that.
02Your first-mortgage rate usually decides it
If your current mortgage rate is well below what refinances cost today, a cash-out refinance reprices your entire balance upward to get at a slice of equity. On a $300,000 mortgage, moving from a 3% rate to a 6.5% rate adds roughly $600 a month before you count the cash you took. A line at 8 to 9% on $60,000 costs about $400 to $450 a month and leaves the $300,000 where it was.
If your current rate is at or above today's refinance rates, the math flips. A refinance can lower the payment on the whole balance and deliver the cash at one fixed rate, and the line becomes the more expensive way to borrow.
03Side by side
| Cash-out refinance | HELOC | |
|---|---|---|
| What it does to the first mortgage | Replaces it | Leaves it alone |
| Rate type | Usually fixed | Usually variable |
| Closing costs | 2 to 5% of the new loan | 0 to 5% of the line, often lower in dollars |
| How you take the money | One lump sum at closing | As needed during the draw period |
| Time to close | 30 to 45 days | 1 to 6 weeks |
| Cap on total debt | Often 80% of value | 80 to 90% of value |
| Resets the clock | Yes, a new 15 or 30 year term | No, first mortgage keeps its schedule |
04When each one makes sense
- A low first-mortgage rate and a one-time need: the line.
- A low first-mortgage rate and a cost that arrives over time: the line.
- A first-mortgage rate above today's and a large one-time need: the refinance, especially if a fixed payment matters.
- A first-mortgage rate above today's and a desire to shorten the term: the refinance.
- Thin equity: often neither, since both products need room under the cap.
A third option, the fixed-rate home equity loan, gives a line's structure with a refinance's predictability: one lump sum, one fixed payment, first mortgage untouched. It suits a known cost when the variable rate on a line is the only thing holding you back.