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If you’ve built up equity in your home, you have two powerful tools to tap into that wealth: a cash-out refinance or a home equity line of credit (HELOC).
But which one is better? The answer depends on your financial goals, how much equity you want to access, and how you plan to use the funds.
In this guide, we’ll break down the key differences between a cash-out refinance and a HELOC so you can make the best choice for your situation in 2025.
🏡 What Is a Cash-Out Refinance?
A cash-out refinance replaces your current mortgage with a new, larger one. You receive the difference between what you owe and your home’s new appraised value as a lump-sum payout.
Example:
- Home Value: $400,000
- Current Loan Balance: $250,000
- Max New Loan (80% LTV): $320,000
- Cash Out: $70,000 (before fees)
Your new loan includes the full $320,000 balance, and you make payments on that amount going forward.
👉 Learn how a Cash-Out Refinance can help you unlock your equity.
💳 What Is a HELOC?
A Home Equity Line of Credit (HELOC) is a second mortgage that gives you a revolving credit line based on your home’s equity—similar to a credit card. You borrow as needed during the “draw period” and only pay interest on what you use.
Submit Your Loan ScenarioMost HELOCs have:
- 10-year draw period (interest-only payments)
- 20-year repayment period (full principal + interest)
You keep your existing mortgage in place and add a new second lien.
👉 Learn about HELOC lenders by state.
🧠 Key Differences: Cash-Out Refinance vs. HELOC
| Feature | Cash-Out Refinance | HELOC |
|---|---|---|
| Structure | New mortgage replaces old one | Second mortgage (line of credit) |
| Funds Access | Lump sum at closing | Draw funds as needed |
| Interest Rate | Fixed or adjustable (often fixed) | Variable (tied to Prime + margin) |
| Payments | Start immediately (principal + interest) | Interest-only during draw period |
| Closing Costs | 2–5% of new loan amount | Lower (sometimes waived) |
| Best For | Large expenses or debt payoff | Flexible spending over time |
| Tax Deductibility | Interest may be deductible* | Interest may be deductible* |
*Always consult a tax advisor regarding mortgage interest deductions.
📋 Qualification Requirements
| Criteria | Cash-Out Refinance | HELOC |
|---|---|---|
| Credit Score | 620+ (680+ for better terms) | 660+ typically |
| Home Equity Needed | 20%+ typically required | 15–20%+ equity usually needed |
| Loan-to-Value (LTV) | Up to 80% of home value | Up to 85–90% depending on lender |
| Income Verification | Required (W-2s or bank statements) | Required (may be lighter for some lenders) |
| Appraisal | Required | Usually required |
🛠️ When to Choose a Cash-Out Refinance
A cash-out refinance may be a better fit if you:
- Want to access a large amount of cash (e.g., $50,000+)
- Plan to use funds immediately for debt payoff or renovations
- Want the security of a fixed-rate mortgage
- Have a high-interest current mortgage and want to refinance at a lower rate
🔗 Use our Loan Comparison Calculator to estimate your new payment with a cash-out refinance.
💡 When to Choose a HELOC
A HELOC might be your best option if you:
- Want ongoing access to funds for future or phased expenses
- Prefer lower upfront costs
- Have a low existing mortgage rate you don’t want to refinance
- Want a flexible credit line for emergencies, college, or business needs
Submit Your Loan Scenario
🔄 Can You Combine a Refinance and a HELOC?
Yes. Some homeowners choose to:
- Refinance their first mortgage to lower their rate or payment
and - Open a HELOC later as a second lien for future access to funds.
This strategy lets you keep monthly payments manageable while maintaining borrowing flexibility.
📊 Cash-Out Refinance vs. HELOC: Quick Decision Matrix
| Situation | Best Option |
|---|---|
| Want a lump sum for a major renovation | Cash-Out Refinance |
| Need flexible access to smaller amounts over time | HELOC |
| Have a high mortgage rate and want to lower it | Cash-Out Refinance |
| Already have a low fixed-rate mortgage | HELOC |
| Want predictable monthly payments | Cash-Out Refinance |
| Need short-term cash but not ready to use it all | HELOC |
🧾 FAQs
Is a HELOC or cash-out refinance better for debt consolidation?
Cash-out refinance is typically better for debt consolidation because it offers fixed rates and structured monthly payments.
Will a HELOC affect my current mortgage?
No. A HELOC is a second mortgage and does not replace your current loan. Your first mortgage remains unchanged.
Are HELOC rates higher than refinance rates?
Usually, yes. HELOCs come with variable interest rates that can fluctuate, while cash-out refis often offer fixed, predictable rates.
🔗 Related Resources
- Cash-Out Refinance Overview
- Bank Statement Loans for Homeowners
- Affordability Calculator
- HELOC Lenders by State
📣 Final Thoughts
Whether you’re renovating your kitchen, consolidating debt, or just want financial flexibility, both cash-out refinancing and HELOCs offer smart ways to put your home.
Unlock Your Home Equity with Figure
- Approval in 5 minutes. Funding in as few as 5 days
- Borrow $20K-$400K
- Consolidate debt or finance home projects
- Fastest way to turn home equity into cash
- 100% online application
Our advice is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.
