If you've built equity in your home, you may be able to turn it into a powerful financial tool. Two of the most common ways homeowners access equity are a cash-out refinance and a Home Equity Line of Credit (HELOC).
When comparing a HELOC vs. refinance, many homeowners wonder which option saves more money, offers more flexibility, or better fits their financial goals. The truth is, the right choice depends on how you plan to use your equity and what you want your payments to look like moving forward.
This guide compares both options side by side, explains how they work, the pros and cons of a HELOC vs. cash-out refinance, and how to decide which one may be right for you.
Key Takeaways
When you're considering a cash-out refinance or a Home Equity Line of Credit (HELOC) as a way to access the equity in your home, here's what you need to know:
- A cash-out refinance replaces your existing mortgage with a new, larger loan and gives you the difference in cash. You'll have one monthly payment with a fixed rate and term.
- A HELOC is a revolving line of credit that acts as a second mortgage, allowing you to borrow against your home equity as needed during a draw period.
- Cash-out refinances work best when current mortgage rates are lower than your existing rate, you need a large lump sum, or you prefer fixed monthly payments.
- HELOCs are ideal when you need flexible access to funds over time, want to keep your current low mortgage rate, or need smaller amounts for ongoing projects.
Both options have closing costs, equity requirements, and impact your home as collateral. Make your choice based on your financial goals, timeline, and current interest rate environment.
Table of Contents
Side-by-Side Comparison: HELOC vs. Cash-Out Refinance
Here’s a quick comparison to help you evaluate both options at a glance:
| Feature |
Cash-Out Refinance |
HELOC |
| How it works |
Replaces your existing mortgage with a larger loan |
Second mortgage with a revolving line of credit |
| Fund disbursement |
Lump sum at closing |
Draw funds as needed during the draw period |
| Interest rate type |
Typically fixed |
Typically variable |
| Number of payments |
One monthly payment |
Two monthly payments: your current mortgage payment and your HELOC payment |
| Closing costs |
Typically 2-5% of the loan amount ($4,000-$10,000+) |
Often lower; may range from $0-$1,000 depending on the lender |
| Typical interest rate |
Generally lower |
Generally higher and varies with the market |
| Repayment term |
Typically 15-30 years |
Often 12 years |
| Payment structure |
Principal and interest throughout the loan term |
Interest is only paid on the balance owed |
| Best for |
Large, one-time expenses or lowering your interest rate |
Ongoing expenses or keeping your current low mortgage rate |
| Flexibility |
No flexibility after closing |
High flexibility during the draw period |
| Typical timeline |
About 30-45 days |
About 2-4 weeks |
| Impact on existing mortgage |
Replaces it entirely |
Keeps it in place |
| Equity required |
Typically requires at least 20% equity remaining after refinancing, or about an 80% maximum loan-to-value ratio |
Typically allows a combined loan-to-value ratio of about 80-85%, depending on lender guidelines; CUA allows HELOCs with a 100% loan-to-value ratio |
| Tax deductibility |
May be deductible when used for eligible home improvements |
May be deductible when used for eligible home improvements |
What Is a Cash-Out Refinance?
A cash-out refinance is a mortgage refinancing option that allows you to replace your existing home loan with a new mortgage for more than you currently owe. The difference between the new loan amount and your existing mortgage balance is paid out to you in cash, which you can use for nearly any purpose.
For example, if your home is worth $400,000 and you owe $200,000 on your mortgage, you might refinance for $280,000. You would use $200,000 to pay off your existing mortgage and receive $80,000 in cash, minus closing costs.
This option lets you turn a portion of your home equity into available funds while also changing your mortgage terms. With a cash-out refinance, you’ll have one mortgage payment each month instead of managing multiple loans.
What Is a HELOC?
A Home Equity Line of Credit, or HELOC, is a revolving line of credit secured by your home that functions similarly to a credit card. Rather than receiving a lump sum, you're approved for a maximum credit limit based on your available home equity, and you can borrow what you need, when you need it, up to that limit.
HELOCs typically have two distinct phases:
- A draw period (10 years), during which you can borrow funds as needed.
- A repayment period, during which you can no longer advance funds and must finish repaying the remaining balance. Your repayment term is based on a 12-year period that resets with your last advance.
Because a HELOC is secured by your home as collateral, it's considered a second mortgage that exists alongside your primary mortgage. This means you'll have two separate monthly payments—one for your original mortgage and one for your HELOC.
VIEW OUR HELOC OPTIONS
The cash-out refinance process is similar to getting your original mortgage, with several key steps:
Application and Approval Process
You'll apply with a lender (ideally your credit union) and go through underwriting, which includes a credit check, income verification, employment verification, and a home appraisal. Lenders typically require a credit score of at least 620, though credit unions may have more flexible requirements for members.
Equity Requirements
Most lenders require you to maintain at least 20% equity in your home after the refinance. This means you can generally borrow up to 80% of your home's current value. If your home is worth $400,000, you could potentially refinance up to $320,000.
Closing Process
Once approved, you'll pay closing costs (typically 2-5% of the loan amount), sign your new mortgage documents, and receive your cash disbursement. Your old mortgage is paid off completely, and you begin making payments on the new loan according to its terms—typically 15 or 30 years with a fixed interest rate.
Interest Rates and Terms
Cash-out refinances typically carry slightly higher interest rates than standard rate-and-term refinances, but they're generally lower than HELOC rates or personal loans. The rate you receive depends on your credit score, loan-to-value ratio, income, and current market conditions.
How Does a HELOC Work?
A HELOC operates differently from a traditional loan, offering more flexibility in how you access and repay funds:
Credit Limit Determination
Your credit union will determine your maximum credit limit based on your home's appraised value, your existing mortgage balance, and your creditworthiness. Like cash-out refinancing, you'll typically be able to borrow up to 80-85% of your home's value, minus what you still owe on your mortgage.
The Draw Period
During the draw period (commonly 10 years), you can access funds as needed using checks, a credit card, or online transfers. You only pay interest on the amount you actually borrow, not your entire credit limit. Many HELOC lenders allow interest-only payments during this phase, keeping monthly costs lower.
The Repayment Period
After the draw period ends, your HELOC enters the repayment period (typically 12 years). You can no longer borrow additional funds, and your payments increase to cover both principal and interest. Some HELOCs allow you to make principal payments during the draw period to reduce your balance.
Variable Interest Rates
Most HELOCs have variable interest rates that fluctuate with market conditions, typically tied to the prime rate. This means your monthly payment can change over time. Some lenders offer fixed-rate options or the ability to convert portions of your balance to a fixed rate.
Pros and Cons of Cash-Out Refinance
Advantages of Cash-Out Refinance
- Fixed interest rate: You'll have predictable monthly payments that won't change over the life of your loan, making budgeting easier.
- Lower interest rates: Cash-out refinances typically offer lower rates than HELOCs, home equity loans, or personal loans.
- One monthly payment: You'll simplify your finances with a single mortgage payment instead of juggling multiple loans.
- Potential to lower your rate: If current rates are lower than your existing mortgage rate, you might reduce your rate while accessing cash.
- Large lump sum: Perfect when you need a significant amount of money all at once for major expenses.
- Longer repayment term: Spreading payments over 15-30 years can make large borrowing amounts more affordable monthly.
- Tax-deductible interest: Interest may be tax-deductible if funds are used for home improvements (consult your tax advisor).
Disadvantages of Cash-Out Refinance
- Higher closing costs: You'll pay 2-5% of the loan amount in closing costs, which can total thousands of dollars.
- Resets mortgage timeline: Refinancing to a new 30-year term means starting over, potentially paying more interest over time.
- May increase your rate: If current rates are higher than your existing mortgage, you'll pay more in interest for the life of the loan.
- Reduces home equity: Taking cash out means you own less of your home outright.
- Lengthy process: Expect 30-45 days to close, with extensive documentation and appraisal requirements.
- Risk of foreclosure: Your home is collateral—defaulting could lead to losing your home.
- Harder to qualify: Stricter requirements than HELOCs, including credit score, debt-to-income ratio, and income verification.
Pros and Cons of HELOC
Advantages of HELOC
- Flexible access to funds: Borrow only what you need, when you need it, during the draw period.
- Pay interest only on what you use: Unlike a lump sum loan, you're only charged interest on your outstanding balance.
- Preserves your mortgage rate: Keep your existing low mortgage rate instead of refinancing to a potentially higher rate.
- Revolving credit: As you pay down your balance, that credit becomes available again during the draw period.
- Faster approval: Generally quicker and easier to obtain than a cash-out refinance.
- Lower closing costs: Typically costs less to establish than refinancing, with some credit unions offering no-closing-cost HELOCs.
- Good for ongoing projects: Ideal when you're not sure exactly how much you'll need or will use funds over time.
Disadvantages of HELOC
- Variable interest rates: Your rate and payment can increase, making budgeting more difficult.
- Payment shock: When the draw period ends, payments can increase significantly as you begin repaying principal.
- Two monthly payments: You'll manage both your primary mortgage and HELOC payments separately.
- Temptation to overspend: Easy access to credit can lead to borrowing more than necessary.
- Risk of foreclosure: Like any mortgage product, defaulting puts your home at risk.
- Potential for rate increases: Rising interest rates can make your HELOC much more expensive over time.
- Requires discipline: Making only minimum payments can lead to a large balance that's difficult to repay.
When Does a Cash-Out Refinance Make Sense?
A cash-out refinance is typically the better choice in these situations:
When Current Rates Are Lower
If mortgage rates have dropped since you bought your home, a cash-out refinance allows you to access equity and reduce your interest rate—essentially getting paid to lower your monthly costs.
When You Need a Large Lump Sum
For major one-time expenses like extensive home renovations, paying off high-interest debt, or covering college tuition, the lump sum from a cash-out refinance provides all the funds you need at once.
When You Want Payment Predictability
If you prefer knowing exactly what your payment will be each month for the life of the loan, the fixed rate and term of a cash-out refinance provides stability and simplifies budgeting.
When You Want to Consolidate Debt
Consolidating high-interest credit cards, personal loans, or other debts into your lower-rate mortgage can save thousands in interest and simplify your finances with one payment.
When You Want to Simplify
If you prefer managing one mortgage payment instead of juggling your primary mortgage plus a second lien, a cash-out refinance keeps things simple.
VIEW OUR REFINANCE OPTIONS
When Does a HELOC Make Sense?
Consider a HELOC when you're in one of these scenarios:
When You Want to Keep Your Low Rate
If you locked in a great rate on your mortgage and current rates are higher, a HELOC allows you to access equity without losing your favorable existing mortgage terms.
When You Need Flexible Access
For ongoing projects with uncertain costs—like a phased home renovation, college expenses spread over several years, or a financial safety net—a HELOC's flexibility is invaluable.
When You Need Smaller Amounts
If you don't need a large lump sum and want to minimize interest costs by borrowing only what you need, when you need it, a HELOC's revolving structure is more economical.
When You Have Irregular Income
Self-employed individuals or those with variable income appreciate the flexibility to borrow during lean months and pay down during profitable periods.
When You Want Quick Access
If you need funds relatively quickly and don't want to wait 30-45 days for a refinance to close, HELOCs typically close faster with less paperwork.
When You'll Pay It Off Quickly
If you plan to repay the borrowed funds within a few years, the variable rate risk is minimal, and you'll pay less in interest overall.
VIEW OUR HELOC OPTIONS
Common Uses for HELOCs and Cash-Out Refinances
Both HELOCs and cash-out refinances can be used for virtually any purpose, but homeowners typically use them for:
Home Improvements and Renovations
From kitchen remodels to room additions, using home equity for improvements can increase your property value. Bonus: interest may be tax-deductible when funds are used for substantial home improvements.
Debt Consolidation
Consolidating high-interest credit cards, personal loans, or student loans into a lower-rate mortgage product can save thousands in interest and simplify monthly payments.
Education Expenses
Funding college tuition or continuing education with home equity often provides lower rates than private student loans.
Major Purchases
Some homeowners use equity to purchase vehicles, boats, or investment property, though it's important to consider whether pledging your home for depreciating assets makes financial sense.
Emergency Expenses
Medical bills, unexpected repairs, or other financial emergencies can be covered using home equity, often at lower rates than credit cards or personal loans.
Investment Opportunities
Real estate investors or business owners sometimes leverage home equity to fund investments or business expansion, though this carries additional risk.
Emergency Fund or Financial Safety Net
A HELOC specifically can serve as a backup emergency fund, available when needed but costing nothing if you don't use it.
Before deciding which option is right for you, carefully evaluate these important factors:
Current Interest Rate Environment
Compare current mortgage rates to your existing rate. If rates have dropped significantly, a cash-out refinance becomes more attractive. If rates are higher, preserving your current rate with a HELOC might be wiser.
Your Current Mortgage Rate
If you have a mortgage rate below 4%, refinancing to a higher rate—even to access cash—may not make financial sense. A HELOC keeps your low rate intact.
How Much Money You Need
For large amounts ($50,000+), the lower rates of a cash-out refinance often offset the higher closing costs. For smaller amounts, a HELOC's lower upfront costs might be more economical.
Your Timeline and Urgency
If you need funds quickly, a HELOC's faster closing process is beneficial. If you can wait 30-45 days and want the best rate, a cash-out refinance works well.
Payment Predictability vs. Flexibility
Consider your financial personality. Do you prefer knowing exactly what you'll pay (cash-out refinance) or do you value flexibility and lower initial payments (HELOC)?
How You'll Use the Funds
One-time expenses favor cash-out refinancing, while ongoing or uncertain costs favor a HELOC. Be honest about whether you'll use funds wisely or might be tempted to overspend.
Your Credit Score and Qualifications
Cash-out refinances typically require higher credit scores and stricter qualification standards. If you have less-than-perfect credit, a HELOC might be more accessible, especially through your credit union.
Closing Cost Analysis
Calculate your break-even point. If you're refinancing primarily to access cash (not to lower your rate), how long will it take to recoup those closing costs?
Future Plans
If you plan to sell your home within a few years, paying high closing costs for a cash-out refinance might not make sense. Similarly, consider how long you'll carry the debt.
Risk Tolerance
Can you handle potential payment increases with a variable-rate HELOC? Or do you need the security of a fixed-rate cash-out refinance? Be realistic about your comfort with uncertainty.
Total Cost Over Time
Don't just compare rates—calculate the total interest you'll pay over the life of each option, factoring in how long you'll carry the debt and potential rate changes.
What makes a HELOC from CUA special?
When considering a Home Equity Line of Credit (HELOC), it’s important to understand the unique features offered by your lender. At CUA, we want you to have a clear picture of what to expect, so you can make the best financial decision for your needs. Here’s what sets our HELOC apart:
No Interest-Only Payments
Unlike some lenders, CUA does not offer interest-only payment options during the draw period. Every payment you make includes both principal and interest, which means you start reducing your balance right away. This approach helps you build equity faster and manage your debt more effectively.
Flexible Repayment Period
After your draw period ends, you’ll have up to 12 years to repay any outstanding balance from the last advance date. This gives you plenty of time to manage repayment on terms that fit your budget.
Borrow Up to 100% of Your Home’s Value
Many financial institutions limit HELOC borrowing to 80–85% of your home’s appraised value. At CUA, we allow qualified members to borrow up to 100% of their home’s value. This increased borrowing power gives you more flexibility to achieve your financial goals—whether you’re renovating, consolidating debt, or covering unexpected expenses.
Ready to Tap Into Your Home Equity?
Choosing between a HELOC and a cash-out refinance is an important financial decision that depends on your unique circumstances, goals, and the current interest rate environment.
Both options provide valuable access to your home equity, but the right choice varies based on how much you need, when you need it, and what you're comfortable paying.
The good news? You don't have to make this decision alone. At Credit Union of America, we’ll guide you through the process to ensure you make the right decision for your finances.
Our experienced mortgage team can help you:
- Calculate exactly how much equity you have available
- Compare real numbers for both options based on your specific situation
- Understand the true costs, including closing costs and total interest over time
- Determine which option aligns with your financial goals
- Get pre-qualified to understand your borrowing power
- Navigate the application process with expert support
Ready to get started?
TALK TO OUR MORTGAGE TEAM
Can I have both a HELOC and a cash-out refinance?
Not simultaneously in the traditional sense, since a cash-out refinance replaces your existing mortgage. However, you could do a cash-out refinance and then later apply for a HELOC on the remaining equity, though this means having two mortgage payments.
Which option has lower interest rates?
Cash-out refinances typically offer lower interest rates than HELOCs because they're first-position loans with fixed rates. HELOCs are second-position liens with variable rates, which are generally higher but only charged on funds you actually use.
How much equity do I need for each option?
Both typically require you to maintain at least 15-20% equity in your home after borrowing. Most lenders allow you to borrow up to 80-85% of your home's value minus your existing mortgage balance.
Are closing costs tax-deductible?
Generally, no. Closing costs themselves aren't tax-deductible, though points paid on a refinance may be deductible over the life of the loan. The interest on both products may be tax-deductible if funds are used for substantial home improvements. Consult a tax professional for your specific situation.
Will I need an appraisal?
Yes, both options typically require a professional appraisal to determine your home's current market value and available equity. Some lenders may use automated valuation models (AVMs) for smaller amounts.
Can I pay off a HELOC early?
Yes, most HELOCs allow early repayment without penalties, though some may have early closure fees if you close the line of credit within the first few years. Check your specific terms.
What happens to my HELOC if home values drop?
If your home value declines significantly, your lender could freeze or reduce your credit line, though this is rare except in severe market downturns. Your existing borrowed balance remains unchanged.
Which option is better for debt consolidation?
Cash-out refinancing is generally better for consolidating large amounts of high-interest debt because you get a lump sum at a fixed, lower rate. A HELOC works if you have smaller debts or want to pay off debts gradually.
How does my credit score affect my options?
Cash-out refinances typically require credit scores of 620 or higher, with the best rates going to scores above 740. HELOCs may have slightly more flexible requirements, especially at credit unions. Higher scores qualify for better rates in both cases.
What if I already have a HELOC?
If you have an existing HELOC and do a cash-out refinance, you'll need to pay off the HELOC as part of the refinance, as the new mortgage must be in first position. You can include the HELOC balance in your cash-out amount.
Which option is faster to access?
HELOCs typically close in 2-4 weeks with less documentation, while cash-out refinances take 30-45 days and require more extensive paperwork, verification, and processing.
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