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Homeowners looking to leverage the equity in their homes often find themselves comparing a Home Equity Line of Credit (HELOC) and a Cash-Out Refinance. Both options offer access to funds based on your home’s equity, but they differ in structure, interest rates, repayment terms, and ideal use cases. In this comprehensive guide, we’ll break down how each works, when each is best used, and help you determine which option fits your financial goals.
What Is a HELOC?
A HELOC (Home Equity Line of Credit) is a revolving line of credit secured by the equity in your home. Think of it like a credit card: you’re approved for a limit and can borrow as needed during a draw period (usually 5–10 years), only paying interest on the amount you use.
Key Features of a HELOC:
- Variable interest rates
- Draw and repayment periods (draw phase typically 5–10 years; repayment phase 10–20 years)
- Interest-only payments during draw period
- Funds can be used multiple times up to the limit
Pros of HELOC:
- Flexibility to borrow as needed
- Pay interest only on the amount borrowed
- Typically lower upfront costs than refinancing
Cons of HELOC:
- Variable interest rates can increase over time
- Risk of over-borrowing due to revolving nature
- Requires discipline to avoid accumulating debt
Thinking of using your home equity for remodeling or major expenses? Learn how HELOCs can help.
What Is a Cash-Out Refinance?
Cash-out refinance replaces your existing mortgage with a new, larger loan. You receive the difference between your current mortgage balance and your home’s appraised value in cash.
Key Features of a Cash-Out Refinance:
- Fixed or adjustable interest rates
- Combines current mortgage and cash-out into a single monthly payment
- Often involves closing costs (2-5% of the loan amount)
- Funds paid out in a lump sum
Pros of Cash-Out Refinance:
- Potential for lower interest rate than HELOC
- Fixed-rate options available for predictable payments
- Can consolidate high-interest debt at lower rates
Cons of Cash-Out Refinance:
- Higher upfront costs
- Replaces your current mortgage
- Longer approval and underwriting process
Need a lump sum for a major purchase or debt consolidation? Explore cash-out refinance options.
HELOC vs Cash-Out Refinance: Side-by-Side Comparison
| Feature | HELOC | Cash-Out Refinance |
| Loan Type | Revolving line of credit | New mortgage loan |
| Interest Rate | Usually variable | Usually fixed |
| Payment Structure | Interest-only (draw), then full repayment | Fixed monthly payments |
| Access to Funds | As needed, up to the limit | Lump sum |
| Closing Costs | Low to moderate | Higher (2–5%) |
| Use Case | Ongoing expenses, flexibility | One-time large expenses |
| Risk | Rising rates, temptation to over-borrow | Larger mortgage, longer term |
Which Is Right for You?
Choose a HELOC if:
- You want flexibility and ongoing access to funds
- You’re comfortable with variable interest rates
- You’re planning small or phased expenses (like home improvements)
Choose a Cash-Out Refinance if:
- You want a lump sum
- You prefer a fixed interest rate and structured payments
- You’re consolidating debt or making a large one-time investment
Need personalized guidance on which loan fits your situation? Contact one of our mortgage experts today.
FAQs
Is a HELOC or cash-out refinance easier to qualify for?
It depends on your credit score, home equity, and income. HELOCs may have slightly more flexible credit requirements, but both require sufficient equity and a low debt-to-income ratio.
Can I use HELOC or refinance funds for any purpose?
Yes, you can use the funds for any purpose: home renovations, tuition, medical bills, or debt consolidation.
Will either option affect my taxes?
In some cases, the interest on a HELOC or cash-out refinance may be tax-deductible if the funds are used for home improvement. Always consult a tax advisor.
Read Next
By understanding the core differences between a HELOC and a cash-out refinance, you can choose the home equity strategy that supports your financial goals—whether it’s funding a remodel, consolidating debt, or making a major investment.
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.
