HELOC vs. Home Equity Loan vs. Cash-Out Refinance
The short version
- A HELOC is a flexible credit line, usually with a variable rate.
- A home equity loan is a one-time lump sum, usually with a fixed rate and fixed payment.
- A cash-out refinance replaces your current mortgage with a larger one and pays you the difference.
- All three use your home as collateral.
Side by side
| HELOC | Home equity loan | Cash-out refinance | |
|---|---|---|---|
| How you get the money | Draw as needed, up to a limit | One lump sum | One lump sum |
| Typical rate type | Variable | Fixed | Fixed or adjustable |
| Your existing mortgage | Stays as it is | Stays as it is | Paid off and replaced |
| Number of payments | Mortgage plus HELOC | Mortgage plus loan | One new mortgage |
| Payment predictability | Can change | Stays the same | Stays the same if fixed |
| Closing costs | Often lower | Varies | Often the highest, since the whole mortgage is redone |
When a HELOC tends to fit
A HELOC suits costs that arrive over time or that you cannot pin down in advance: a renovation done in stages, tuition paid each term, or a cushion you may not fully use. You pay interest only on what you draw. The trade-off is a rate that can move.
When a home equity loan tends to fit
A home equity loan suits a single, known expense, such as a roof replacement with a signed quote, or paying off a specific set of higher-rate debts. The rate and payment are set from the start, which makes budgeting simple. The trade-off is less flexibility: if you need more later, you need another loan.
When a cash-out refinance tends to fit
A cash-out refinance changes the rate and term on your entire mortgage, not just the new money. It can make sense when current mortgage rates are close to or below the rate you already have, or when you want one payment instead of two.
If your existing mortgage rate is well below today's rates, a cash-out refinance means giving that rate up on your whole balance. In that case a HELOC or home equity loan, which leave the first mortgage alone, are usually worth comparing first.
Questions that narrow it down
- Do you know the exact amount? If yes, a lump sum works. If not, a line of credit is more forgiving.
- How does your current mortgage rate compare with today's? A low existing rate argues against replacing the mortgage.
- How would a higher payment affect you? If a rising payment would strain your budget, weight the fixed-rate options.
- How long will you stay in the home? Upfront costs take time to pay for themselves.
Compare more than one offer
Rates, fees and limits differ between lenders for the same borrower. Whichever product you lean toward, compare written terms from more than one lender, and look at total cost over the time you expect to hold the loan, not just the opening rate.
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This guide is general information to help you ask better questions. It is not financial, legal or tax advice, and it is not an offer of credit. Loan terms, eligibility and costs are set by each lender and vary by state and by borrower.