Cash-Out Refinance vs. HELOC: Which Should You Choose?

A home equity line of credit and a cash-out refinance are both ways to access value that has accumulated in your home. Here's what to consider when deciding which is best for you.

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Home Equity Loan or HELOC vs. Cash-Out Refinance: Ways to Tap Your Home's Value

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Cash-out refinances and home equity lines of credit — called HELOCs — are both ways to turn some of your home's value into funds you can use to accomplish other goals, like paying for home improvements or consolidating debt.

You get the cash by borrowing against your home equity, which is the difference between the current value of your home and the amount left on your mortgage.

Although these loans are both tied to your home’s value, they’re not the same. A HELOC is a second mortgage, which you’ll repay on top of your existing home loan. A cash-out refinance replaces your current mortgage with a new one — complete with its own term, interest rate and a single monthly payment.

If you're thinking about tapping into your home equity, here's what you should know.

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What is a cash-out refinance?

A cash-out refinance replaces your original mortgage with an entirely new loan that's greater than what you currently owe. Your refinanced mortgage will come with a new rate and set of terms, which can make it an ideal choice if you could lower your mortgage interest rate or if you want to change the length of time you have to pay off the mortgage.

Rates for cash-out refinances are generally higher than for standard rate and term refinances, though your interest rate will still probably be lower than a HELOC rate. However, you may need to pay more in closing costs.

🤓Nerdy Tip

When comparing HELOC rates against cash-out refinance rates, you’ll want to add the estimated monthly HELOC payment to your current mortgage payment. This is the total amount you’ll be paying each month. If it’s less than your estimated monthly payment with a cash-out refinance, a HELOC is likely to be the more economical option. If it’s higher, a cash-out refinance may be the way to go.

You can also use NerdWallet’s refinance calculator, which accounts for closing costs in your interest savings projection.

With a conventional cash-out refinance, you can typically borrow up to 80% of your home equity. You can estimate how much you may be able to borrow using NerdWallet’s cash-out refinance calculator.

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What is a home equity line of credit (HELOC)?

A home equity line of credit is a second mortgage that doesn't affect your primary mortgage rate. You can borrow as needed up to a certain limit (often up to 85% of your home equity) during the draw period, which is typically 10 years. You’re only required to make payments on interest during the draw period.

Then, you enter the second phase of the loan, which is called the repayment period. This usually lasts for 20 years, and you must pay back both principal and interest.

HELOC rates are usually adjustable, so your monthly payments will vary. HELOCs can be an ideal choice if you want to keep your original mortgage rate or need flexibility in the amount you borrow. You can estimate how much you may be able to borrow using NerdWallet’s HELOC calculator.

How cash-out refinances and HELOCs are similar

  • You can typically access 80% or more of your home equity.

  • You can use the money as you see fit, though it’s generally recommended that you borrow against home equity for value-adding expenses such as home improvements.

  • Your home is the collateral, so failure to make payments could lead to foreclosure.

How cash-out refinances and HELOCs are different

  • Interest rates are generally lower for cash-out refinances than for HELOCs.

  • Cash-out refinance rates are fixed, while HELOC rates are often variable. 

  • Closing costs are generally higher for cash-out refinances, since a refinance is a new mortgage. Closing costs for HELOCs are typically lower, and some lenders don’t charge closing costs for HELOCs.

  • A cash-out refinance results in one new larger loan, while a HELOC is a loan in addition to your first mortgage.

  • You receive the money from a cash-out refinance all at once, while you can draw from a HELOC as needed over time. 

Home equity loans: another way to access equity

An alternative to a HELOC or cash-out refinance is a home equity loan. A home equity loan lets you borrow a lump sum that you pay back at a fixed rate. It’s a second mortgage like a HELOC, so you'll make payments on it in addition to your regular monthly mortgage payments. Unlike a HELOC, the loan is funded all at once, and you pay both principal and interest right away.

Features of the loan

HELOC

Home equity loan

Loan funding

Borrowers can draw funds as needed, up to a certain limit (typically a percentage of their equity).

Borrowers receive a lump sum at closing (typically a percentage of their equity).

Terms

Begins with a draw period (typically 10 years) with interest-only minimum payments, followed by a repayment period (often up to 20 years) that requires borrowers to pay back principal and interest.

Repayment periods are often up to 30 years. Minimum payments include both interest and principal.

Rates

Variable, though some lenders offer a fixed-rate option.

Fixed.

Borrowing limits

Borrowers can typically borrow between 80% and 85% of their equity in their home, though some lenders allow for more. Use NerdWallet's HELOC calculator for personalized details.

Borrowers can typically borrow between 80% and 85% of their equity in their home, though some lenders allow for more. Use NerdWallet’s home equity loan calculator for personalized details.

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Is it better to get a second mortgage or refinance?

If you're weighing a second mortgage in the form of a HELOC or home equity loan against a cash-out refinance, here are a few things you can consider.

Current mortgage rates: If refinancing could get you a lower rate and you intend to stay in the home long enough to hit your break-even point, then a cash-out refinance may make more sense than a second mortgage.

How much you want to borrow: If you’re borrowing a relatively small amount of money — say, 30% of your equity — a home equity loan may be a better option since you won't have to pay hefty refinance closing costs but you'll still receive the funds as a lump sum. Alternatively, if you’re borrowing a large amount of your equity and can get a lower rate offer on a cash-out refinance than on a second mortgage, the overall interest savings may outweigh the closing costs.

Your plans for the money: If you're not sure exactly how much you'll need to borrow, or your expenses might unfold over a long period of time, a HELOC may be your best choice. If you know exactly how much you’ll need to borrow, a cash-out refinance or home equity loan can be a good fit.