Editorial Disclosure: Emily Chen, NMLS #1567234, has 8+ years of experience in construction and commercial lending. All calculations use February 2026 market rates. We may earn a commission from partner links — this never influences our analysis.
You've built up equity in your home and now you need cash — maybe for a renovation, debt consolidation, or an investment property down payment. The two main options are a HELOC (Home Equity Line of Credit) and a cash-out refinance. Both tap your home equity, but the math is dramatically different depending on your situation.
I've structured over 500 equity transactions in my career, and the #1 mistake I see is people choosing based on "what their neighbor did" instead of running the actual numbers. Let's fix that.
How They Work: A Quick Refresher
HELOC
A revolving credit line secured by your home. Draw funds as needed during the draw period (usually 10 years), then repay over 10-20 years.
- Rate: Variable (prime + margin)
- Draw period: 5-10 years
- Repayment: 10-20 years
- Your 1st mortgage: Stays the same
Cash-Out Refinance
Replace your existing mortgage with a new, larger one. The difference between the old and new loan is paid to you in cash at closing.
- Rate: Fixed (typically)
- Term: 15 or 30 years
- Closing costs: 2-5% of loan
- Your 1st mortgage: Replaced entirely
The 2026 Math: $100K Equity Draw on a $400K Home
Let's run the numbers on the most common scenario. You own a $500K home with a $300K mortgage at 3.25% (locked in 2021). You need $100K for a kitchen renovation.
| Factor | HELOC | Cash-Out Refi |
|---|---|---|
| Amount Accessed | $100,000 | $100,000 |
| New Total Debt | $300K + $100K | $400K (new loan) |
| Rate on Existing $300K | 3.25% (kept!) | 6.25% (replaced) |
| Rate on $100K Draw | 8.25% (variable) | 6.25% (fixed) |
| Monthly Payment (1st Mortgage) | $1,306 (unchanged) | $2,463 (new) |
| Monthly Payment (Equity) | $688 (HELOC) | Included above |
| Total Monthly Payment | $1,994 | $2,463 |
| Closing Costs | $0-$500 | $8,000-$12,000 |
| 10-Year Interest Cost | $198,720 | $255,560 |
| 10-Year Total Cost | $199,220 | $265,560 |
The Verdict for This Scenario
The HELOC saves $66,340 over 10 years because you keep your 3.25% rate on the original $300K. Even though the HELOC rate (8.25%) is higher than the cash-out rate (6.25%), you're only paying that higher rate on $100K instead of the entire $400K. This is the "rate preservation" advantage that most articles miss.
When Cash-Out Refinance Wins Instead
The math flips when your existing mortgage rate is already high. If your current rate is above 6.5%, a cash-out refinance at 6.25% actually lowers your rate while giving you cash. Here's the break-even:
Break-Even Rule of Thumb
- Current rate below 5.5%: HELOC wins (almost always)
- Current rate 5.5%-6.5%: Run the numbers — it's close
- Current rate above 6.5%: Cash-out refi likely wins
To see which option saves you more, compare personalized rates here.
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Get My Rates Now →5 Factors Beyond the Rate
1. Closing Costs
HELOCs typically have $0-$500 in closing costs. Cash-out refinances cost 2-5% of the new loan amount ($8,000-$20,000 on a $400K loan). This upfront cost difference is massive and takes years to recoup.
2. Rate Risk (Variable vs. Fixed)
HELOC rates are variable — if the Fed raises rates, your payment increases. Cash-out refinances lock in a fixed rate for 30 years. If you're risk-averse or plan to carry the debt long-term, the fixed rate provides certainty.
3. Flexibility
A HELOC is a revolving line — draw what you need, when you need it. Pay it down, draw again. A cash-out refi gives you a lump sum at closing. For ongoing projects or uncertain costs, the HELOC's flexibility is invaluable.
4. Tax Deductibility
Both are deductible only if used for home improvements (buy, build, or substantially improve). Using funds for debt consolidation or other purposes? No deduction. Consult your CPA — this is a common and costly misunderstanding.
5. Impact on Your First Mortgage
This is the dealbreaker for most people. A HELOC preserves your existing mortgage rate. A cash-out refi replaces it. If you locked in 2.75%-3.5% during 2020-2021, losing that rate costs you tens of thousands of dollars.
Real Scenario: Investment Property Down Payment
My client Marcus needed $80K for a rental property down payment. He owned a $600K primary residence with a $350K mortgage at 3.0%. Here's what we calculated:
HELOC Option
- Keep 3.0% on $350K mortgage
- HELOC: $80K at 8.0%
- Monthly: $1,476 + $533 = $2,009
- Closing costs: $0
- 5-year interest cost: $147,540
Cash-Out Refi Option
- New rate: 6.25% on $430K
- Monthly: $2,648
- Closing costs: $10,750
- 5-year interest cost: $189,880
Marcus went with the HELOC and saved $639/month and $53,090 over 5 years. The rental property cash flow more than covered the HELOC payment. He plans to pay off the HELOC with rental income within 4 years. For real estate investors, comparing HELOC rates from multiple lenders is essential to maximize your ROI.
Decision Framework
Choose a HELOC if:
- • Your current mortgage rate is below 5.5%
- • You need flexible, ongoing access to funds
- • You plan to repay within 5-10 years
- • You want to avoid $8K-$12K in closing costs
- • You're comfortable with variable rate risk
Choose a Cash-Out Refinance if:
- • Your current mortgage rate is above 6.5%
- • You want a fixed rate and predictable payment
- • You need a large lump sum (not revolving)
- • You plan to stay in the home 7+ years
- • You want to consolidate debt into one payment
Frequently Asked Questions
Is a HELOC or cash-out refinance cheaper in 2026?
If your current mortgage rate is below 5.5%, a HELOC is almost always cheaper because you keep your low rate. If your rate is above 6.5%, a cash-out refi might save you money by lowering your overall rate.
What are HELOC rates in February 2026?
Average HELOC rates range from 7.50% to 9.25% depending on credit score and LTV. Prime rate is 7.50%, and most HELOCs are priced at prime + 0% to prime + 1.75%.
Can I deduct HELOC interest on my taxes?
Only if you use the funds to buy, build, or substantially improve your home. Using a HELOC for debt consolidation or other purposes means the interest is NOT deductible.
How much equity do I need?
For a HELOC, most lenders require 15-20% equity remaining (max 80-85% combined LTV). For a cash-out refi, you need at least 20% equity remaining (max 80% LTV conventional).
Find Your Best Home Equity Option
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