HELOC vs. cash-out refinance: keep your low rate or replace it?

By Rachel Morgan

Home Equity Editor · Oct 20, 2026 · 8 min read

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If you locked in a low mortgage rate a few years ago, you're probably in no hurry to give it up. But maybe you need cash for a new roof, a kitchen remodel, or to pay off high-interest debt. You've got equity in your home. Now you need to decide how to tap it.

The two most common choices are a home equity line of credit (HELOC) and a cash-out refinance. They both turn home equity into cash, but they work very differently. One keeps your current mortgage. The other replaces it.

This guide walks through how each one works, what they typically cost, and a simple way to compare them for your situation.

The short answer

• A HELOC is a second loan on top of your current mortgage. You keep your existing rate and borrow only what you need, when you need it. The rate is usually variable.
• A cash-out refinance replaces your current mortgage with a new, bigger one. You get the difference in cash. Your whole balance moves to the new rate, and you pay closing costs on the full loan.

If your current mortgage rate is well below today's rates, a HELOC often keeps more of that low rate working for you. If your current rate is already at or above today's rates, or you want one fixed payment, a cash-out refinance can make more sense. The right answer depends on your numbers.

How a HELOC works

A HELOC is a revolving line of credit secured by your home. Think of it a bit like a credit card with your house as collateral, usually at a much lower rate than a card.

• Draw period. You can borrow, repay, and borrow again up to your limit. This often lasts around 10 years. Many HELOCs let you pay interest only during this time.
• Repayment period. After the draw period ends, you can't borrow more. You repay principal and interest, often over 10 to 20 years.
• Variable rate. Most HELOC rates are tied to an index, usually the prime rate, plus a margin set by the lender. When the index moves, your rate and payment move too. Some lenders let you lock part of your balance at a fixed rate.

Your first mortgage stays exactly as it is. Same rate, same payment, same payoff date.

How a cash-out refinance works

A cash-out refinance pays off your current mortgage with a new, larger loan. You receive the difference, minus closing costs, as cash.

• One loan, one payment. You end up with a single mortgage, often with a fixed rate.
• New rate on everything. The new rate applies to your entire balance, not just the cash you took out.
• New term. Many people take a new 30-year loan, which restarts the clock on your mortgage.
• Full closing costs. Refinance closing costs often run about 2% to 6% of the new loan amount, depending on the lender and where you live.

Most conventional and FHA cash-out refinances on a single-family primary home cap your new loan at 80% of the home's value. VA loans can allow more for eligible borrowers, though many lenders set their own lower limits.

Side-by-side comparison

Worked example: keeping a low rate vs. replacing it

This is a hypothetical example to show the math. The rates are made up for illustration and are not current quotes or an offer of credit. Your rate and terms will be set by the lender.

Say your home is worth $400,000. You owe $240,000 on a mortgage at 3.25% with 22 years left. Your principal and interest payment is about $1,274 a month. You want $50,000 for a remodel.

Option A: HELOC. You open a HELOC and draw $50,000 at an example variable rate of 8.5%.

• First mortgage: about $1,274 a month (unchanged)
• HELOC, interest-only during the draw period: about $354 a month
• Total: about $1,628 a month

Option B: Cash-out refinance. You take a new 30-year loan for $290,000 at an example fixed rate of 6.75%.

• New mortgage: about $1,881 a month
• Plus closing costs. At 3% of the loan, that's about $8,700.
• Total: about $1,881 a month, plus closing costs

Why the gap? Your blended rate tells the story. With the HELOC, $240,000 stays at 3.25% and only $50,000 sits at 8.5%. That works out to a blended rate of about 4.16%. With the cash-out refi, all $290,000 moves to 6.75%.

Now the trade-offs. The HELOC payment above is interest only, so you aren't paying down the $50,000 yet. If you repaid it over 20 years at the same rate, that part would be about $434 a month. And if the HELOC rate rose to 10.5%, the interest-only payment would climb to about $438. The cash-out refinance costs more each month here, but the payment is fixed and you have one simple loan.

When a HELOC may fit better

• Your current mortgage rate is noticeably lower than today's refinance rates.
• You need money in stages, like a remodel paid out over several months.
• You plan to pay back what you borrow fairly quickly.
• You can handle a payment that may rise if rates go up.
• You want to avoid paying closing costs on your whole mortgage balance.

When a cash-out refinance may fit better

• Your current rate is about the same as, or higher than, what you'd get on a new loan.
• You want a fixed rate and one predictable payment.
• You need a large lump sum all at once.
• You'd like to change your loan in other ways too, like moving off an adjustable rate.
• You plan to stay in the home long enough to earn back the closing costs.

Costs and risks to weigh either way

Your home is the collateral. With both options, falling behind on payments can put your home at risk. Borrow what you need, not the most you can get.

Variable rates can rise. A HELOC payment that's comfortable today may not be in a few years. Ask how often the rate can change and whether there's a cap.

Watch the payment jump. When a HELOC's draw period ends, the payment can rise sharply because you start repaying principal. Plan for it from day one.

Restarting the clock costs money. A new 30-year cash-out loan can lower your payment but add years of interest. Compare total interest, not just the monthly number.

Fees add up. HELOCs may come with appraisal fees, annual fees, or early closure fees. Cash-out refinances come with full closing costs. Compare the APR and the total cost, not just the rate.

Taxes depend on how you use the money. Under current IRS rules, interest on home equity debt is generally deductible only if you use the money to buy, build, or substantially improve the home that secures the loan, and only if you itemize. Talk to a tax professional about your situation.

How to compare your options

1. Know your numbers. Find your current balance, rate, and years left. Get a realistic estimate of your home's value.
2. Decide how much you need. Add a small cushion, but don't borrow just because you can.
3. Get quotes for both. Ask for the rate, APR, fees, and payment for a HELOC and for a cash-out refinance.
4. Compare total cost over your time horizon. How long will you stay in the home? How fast will you repay?
5. Stress-test the HELOC. Run the payment at a rate a few points higher and at the start of repayment.

Many lenders let you check rates with a soft credit inquiry, which doesn't affect your credit score. A full application may involve a hard inquiry.

The bottom line

A HELOC lets you keep a low first-mortgage rate and borrow only what you need, but you take on a variable rate and a payment that can change. A cash-out refinance gives you one fixed payment, but moves your whole balance to today's rate and comes with full closing costs.

If you're sitting on a low rate, the HELOC math often looks better. If your rate is already high, a cash-out refinance may be the cleaner choice. Run both with real quotes before you decide.

About the author

Rachel Morgan

Home Equity Editor

Rachel edits Cashzilla's home equity coverage, from HELOCs to home equity loans. She focuses on turning lender fine print into clear, side-by-side comparisons.