HELOC vs Cash-Out Refinance 2025: Complete Comparison Guide

Quick Answer: HELOC vs Cash-Out Refinance

Choose HELOC If:

✓ You have a low existing mortgage rate (under 5%) you don't want to lose
✓ You need flexible access to funds over time (not a lump sum)
✓ You're doing ongoing home improvements in phases
✓ You want to pay interest only on what you use
✓ You can handle variable rate risk

Choose Cash-Out Refinance If:

✓ Your current mortgage rate is above 7% (you can lower it)
✓ You need a large lump sum for a specific purpose
✓ You want a fixed rate and predictable payments
✓ You're consolidating high-interest debt
✓ You prefer one monthly payment instead of two

HELOC vs Cash-Out Refinance: Complete Comparison

Feature	HELOC	Cash-Out Refinance
Current Rates (Dec 2025)	8.0-9.5% (variable)	6.5-7.5% (fixed)
Rate Type	Variable (tied to Prime)	Fixed (locked for 30 years)
How You Get Funds	Draw as needed (like credit card)	Lump sum at closing
Replaces Existing Mortgage?	No (keeps current rate)	Yes (new mortgage)
Closing Costs	$0-$500 (often waived)	2-5% of loan amount
Max LTV	80-85% combined	80% (conventional), 85% (FHA)
Draw Period	5-10 years	N/A (lump sum)
Repayment Period	10-20 years after draw period	15-30 years
Best For	Ongoing expenses, low current rate	Large lump sum, rate reduction

What Is a HELOC?

A Home Equity Line of Credit (HELOC) is a revolving credit line secured by your home. Think of it like a credit card backed by your home equity. You're approved for a maximum amount (say, $100,000) and can draw funds as needed during the "draw period" (typically 5-10 years).

📊 HELOC Example

Home Value: $500,000

Current Mortgage Balance: $300,000

Available Equity: $200,000

HELOC Limit (80% LTV): $100,000

Calculation: ($500,000 × 80%) - $300,000 = $100,000 available

HELOC Pros

✅ Keep your low mortgage rate: Your existing mortgage stays untouched
✅ Pay interest only on what you use: Borrow $20K of your $100K limit? Pay interest on $20K
✅ Flexible access: Draw funds as needed for ongoing projects
✅ Low/no closing costs: Many lenders waive closing costs
✅ Reusable: Pay it down, borrow again during draw period

HELOC Cons

❌ Variable rate risk: Payments can increase if rates rise
❌ Two payments: Mortgage + HELOC = two monthly payments
❌ Draw period ends: After 10 years, you can't borrow more
❌ Payment shock: Payments jump when repayment period starts
❌ Lender can freeze: In economic downturns, lenders can freeze HELOCs

What Is a Cash-Out Refinance?

A cash-out refinance replaces your existing mortgage with a new, larger loan. You receive the difference in cash. For example, if you owe $300,000 and refinance for $400,000, you get $100,000 cash (minus closing costs).

📊 Cash-Out Refinance Example

Home Value: $500,000

Current Mortgage Balance: $300,000

New Loan Amount (80% LTV): $400,000

Cash Received: $100,000

Closing Costs (3%): -$12,000

Net Cash: $88,000

Cash-Out Refinance Pros

✅ Fixed rate: Lock in a rate for 30 years—no surprises
✅ One payment: Single monthly mortgage payment
✅ Potentially lower rate: If your current rate is high, you might lower it
✅ Large lump sum: Get all your cash at once
✅ Longer repayment: Spread payments over 30 years

Cash-Out Refinance Cons

❌ Lose your low rate: If you have a 3% mortgage, you'll lose it
❌ High closing costs: 2-5% of loan amount ($8,000-$20,000 on $400K)
❌ Restart your mortgage: Back to 30 years of payments
❌ Takes longer: 30-45 days to close vs. 2-3 weeks for HELOC
❌ Higher total interest: Larger loan = more interest over time

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Real Cost Comparison: HELOC vs Cash-Out Refinance

Let's compare the true cost of borrowing $100,000 with each option:

Scenario: Borrowing $100,000 for Home Renovation

HELOC Option

Amount: $100,000
Rate: 8.5% variable
Draw Period: 10 years (interest-only)
Repayment: 15 years
Closing Costs: $0
Monthly Payment (draw): $708
Monthly Payment (repay): $985
Total Interest Paid: $92,460

Cash-Out Refinance Option

Amount: $100,000 (added to mortgage)
Rate: 6.8% fixed
Term: 30 years
Closing Costs: $4,000
Monthly Payment: $652
Total Payments: $234,720
Total Interest Paid: $134,720

Analysis: In this scenario, the HELOC saves $42,260 in total interest despite the higher rate—because you're borrowing for a shorter period. However, if HELOC rates rise to 10%+, the cash-out refinance becomes cheaper.

When to Choose HELOC (5 Scenarios)

1. You Have a Low Existing Mortgage Rate

If you locked in a 3-4% mortgage rate in 2020-2021, a cash-out refinance would force you to give it up for today's 6.8%+ rates. A HELOC lets you keep your low rate while accessing equity.

Example: You have a $400,000 mortgage at 3.25%. Refinancing to cash out $100,000 at 6.8% would increase your monthly payment by $1,200+. A HELOC at 8.5% on just the $100,000 costs $708/month—and you keep your 3.25% rate on the original mortgage.

2. You Need Flexible Access Over Time

Doing a kitchen renovation in phases? Paying for college tuition over 4 years? A HELOC lets you draw funds as needed instead of taking a lump sum and paying interest on money you're not using yet.

3. You Want to Minimize Closing Costs

HELOCs often have zero closing costs (or under $500). Cash-out refinances cost 2-5% of the loan amount. On a $400,000 refinance, that's $8,000-$20,000 in closing costs.

4. You're Uncertain About How Much You Need

If you're not sure exactly how much you'll need (home repairs, medical expenses, etc.), a HELOC gives you access to funds without committing to a specific amount.

5. You Plan to Pay It Off Quickly

If you can pay off the borrowed amount within 5-7 years, a HELOC's higher rate matters less because you're paying interest for a shorter period.

When to Choose Cash-Out Refinance (5 Scenarios)

1. Your Current Mortgage Rate Is High

If you're paying 7%+ on your current mortgage, a cash-out refinance at 6.8% could actually lower your rate while giving you cash. Win-win.

2. You Need a Large Lump Sum

Buying an investment property? Paying off $80,000 in credit card debt? A cash-out refinance delivers all the cash at once with a fixed rate.

3. You Want Payment Predictability

Cash-out refinances have fixed rates. Your payment never changes for 30 years. HELOCs have variable rates that can increase significantly if the Fed raises rates.

4. You're Consolidating High-Interest Debt

Replacing 20%+ credit card debt with a 6.8% mortgage rate saves thousands in interest. The fixed rate ensures your savings are locked in.

5. You Prefer One Monthly Payment

A cash-out refinance means one mortgage payment. A HELOC means your original mortgage payment plus a HELOC payment. Simplicity has value.

💰 Get Personalized Recommendations

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Tax Implications: HELOC vs Cash-Out Refinance

Both HELOC and cash-out refinance interest may be tax-deductible—but only if you use the funds for home improvements.

⚠️ Tax Deduction Rules (2025)

✅ Deductible: Interest on funds used to "buy, build, or substantially improve" your home
❌ Not Deductible: Interest on funds used for debt consolidation, vacations, cars, etc.
📊 Limit: Interest on up to $750,000 of total mortgage debt (including HELOC/cash-out)
📝 Documentation: Keep receipts proving how you used the funds

Frequently Asked Questions

Can I have both a HELOC and a cash-out refinance?

Not simultaneously for the same equity. If you do a cash-out refinance, it replaces your existing mortgage and any HELOC. However, after a cash-out refinance, you could open a new HELOC on any remaining equity.

Which has lower closing costs?

HELOCs typically have $0-$500 in closing costs (often waived). Cash-out refinances cost 2-5% of the loan amount. On a $400,000 refinance, expect $8,000-$20,000 in closing costs.

What happens to my HELOC if home values drop?

If your home value drops significantly, your lender may freeze or reduce your HELOC limit. This happened to many homeowners in 2008-2009. Cash-out refinance funds are yours once you close—they can't be taken back.

How long does each take to close?

HELOCs typically close in 2-4 weeks. Cash-out refinances take 30-45 days. If you need funds quickly, a HELOC is faster.

What credit score do I need?

Both typically require 620+ credit scores, with 680+ for best rates. HELOCs may have slightly stricter requirements since they're second-lien positions (higher risk for lenders).

Can I convert a HELOC to a fixed rate?

Some lenders offer "fixed-rate lock" options that let you convert all or part of your HELOC balance to a fixed rate. This gives you HELOC flexibility with fixed-rate security. Ask lenders about this feature.

Find Your Best Home Equity Option

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Key Takeaways

✅ HELOC: Best if you have a low existing mortgage rate you want to keep
✅ Cash-out refinance: Best if your current rate is high or you need a large lump sum
✅ HELOC rates: 8.0-9.5% variable (December 2025)
✅ Cash-out rates: 6.5-7.5% fixed (December 2025)
✅ Closing costs: HELOC $0-$500 vs. cash-out 2-5% of loan
✅ Tax deduction: Only if funds used for home improvements
✅ Speed: HELOC closes in 2-4 weeks vs. 30-45 days for cash-out
✅ Risk: HELOC rates can rise; cash-out rates are fixed