Cash-Out Refinance vs. HELOC: Which Is Cheaper?

Both let you turn home equity into cash, but they work very differently — and in a higher-rate world, the wrong choice can cost you for decades. Here is how to compare them honestly.

By The Mortgage Draw Team · Reviewed for accuracy June 2026 · Methodology explained below

If your home is worth more than you owe, you are sitting on equity you can borrow against. The two most common ways to do that are a cash-out refinance and a home equity line of credit (HELOC). They both end with cash in your pocket and your house as collateral, but the mechanics, the costs and the risks are different enough that picking the wrong one can quietly cost you tens of thousands of dollars. This guide walks through how each works, compares them side by side, and explains when each tends to win.

What is a cash-out refinance?

A cash-out refinance replaces your existing mortgage with a new, larger one. You borrow more than you currently owe, the old loan is paid off, and you receive the difference as a lump sum of cash at closing.

Say you owe $200,000 on a home worth $400,000 and you take out a new $260,000 mortgage. The first $200,000 clears your old loan; the remaining $60,000 (minus closing costs) comes to you in cash. The crucial detail is that the new interest rate applies to the entire $260,000 — not just the $60,000 you cashed out. You end up with one fixed monthly payment and a single loan, which keeps things simple, but you have reset the rate on everything you owe.

Closing costs typically run about 2% to 5% of the new loan amount, covering the appraisal, lender fees, title work and more. Most lenders also cap your cash-out at around 80% of the home’s value (an 80% loan-to-value limit), though programs vary. You can estimate your cash and new payment with our cash-out refinance calculator, and compare it against a straight rate-and-term refinance using the refinance calculator.

What is a HELOC?

A HELOC is a second loan that sits on top of your existing mortgage — it does not replace it. Instead of a lump sum, you get a revolving line of credit (much like a credit card) secured by your home, with a set credit limit you can borrow against as needed.

HELOCs run in two phases. During the draw period (commonly 5 to 10 years) you can borrow, repay and borrow again, and many lenders let you make interest-only payments. When the draw period ends, the repayment period begins (often 10 to 20 years), during which you can no longer draw and must pay down principal plus interest — so the monthly payment can jump sharply at that transition.

Two features make HELOCs attractive: lower upfront costs (often little or no closing costs, though watch for annual or early-closure fees) and the fact that you only pay interest on what you actually draw. The trade-off is that most HELOCs carry a variable rate tied to an index like the prime rate, so your payment can rise if rates climb. Model different draw amounts and rates with the HELOC calculator.

Side-by-side comparison

When a cash-out refinance wins

A cash-out refinance tends to be the cheaper, cleaner choice when:

• You can also lower your first-mortgage rate. If today’s rates are at or below your current rate, replacing the whole loan can give you cash and a smaller payment — the best of both worlds.
• You want predictability. A fixed rate and a single monthly payment make budgeting simple, with no exposure to rate swings.
• You need a large lump sum now — for a major renovation, consolidating high-interest debt, or a big one-time expense — rather than money in stages.

When a HELOC wins

A HELOC usually comes out ahead when:

• You have a great first-mortgage rate you do not want to touch. This is the big one. If you locked in a low rate, refinancing the entire balance at today’s higher rates could raise the cost of all your debt just to access a slice of equity. A HELOC leaves that low rate alone and borrows only on top. In a higher-rate environment, protecting a cheap first mortgage is often the single most important factor in the decision.
• You want flexibility. A revolving line lets you borrow only what you need, when you need it, and pay interest on just that amount.
• You need money in stages — for example, a phased remodel or a tuition bill spread across several years.

Do not forget the home equity loan

There is a third option worth knowing: a home equity loan. Like a HELOC, it is a second loan that leaves your first mortgage in place — but like a cash-out refinance, it gives you a lump sum at a fixed rate with predictable payments. It is often the sweet spot for someone who wants to protect a low first-mortgage rate and have payment certainty. Run the numbers with the home equity loan calculator.

Taxes and risk: read this part

Tax deductibility is narrow. Interest on either product may be tax deductible, but generally only if you itemize and use the money to buy, build or substantially improve the home that secures the loan, within IRS dollar limits. Using the cash to pay off credit cards or buy a car typically is not deductible. Tax rules change and depend on your circumstances, so confirm with a qualified tax professional before counting on any deduction.

Both put your home on the line. A cash-out refinance and a HELOC are each secured by your house. Miss enough payments and the lender can foreclose. Borrow conservatively, leave yourself a cushion, and remember that a HELOC’s payment can climb when rates rise or when the interest-only draw period ends and principal payments kick in.

This article is educational and is not financial, tax or legal advice. Rates, fees, loan-to-value limits and terms vary widely by lender and change over time. Get personalized quotes and speak with a licensed mortgage professional and a tax advisor before deciding.