Interest-Only HELOCs vs. Cash-Out Refinance Over $500K: A Five-Year Cost Comparison

For homeowners considering tapping into home equity above $500,000, two major options dominate the conversation: interest-only HELOCs (Home Equity Lines of Credit) and cash-out refinancing. Both offer access to significant capital, but they differ dramatically in terms of structure, interest payments, flexibility, and total cost over time. This guide dives deep into how these two options stack up over five years, helping you choose the smartest path forward.

What Is an Interest-Only HELOC?

An interest-only HELOC allows you to borrow against the equity in your home with flexible draw periods and initially low monthly payments—since you’re only required to pay the interest during the initial phase (typically 5-10 years).

Key Benefits:

• Low initial payments during the interest-only period
  
• Flexible borrowing structure—draw funds as needed
  
• Often lower initial rates than cash-out refis
  

However, after the interest-only period ends, payments can increase significantly as you begin to repay both principal and interest.

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What Is a Cash-Out Refinance?

With a cash-out refinance, you replace your existing mortgage with a new, larger loan and receive the difference in cash. This option tends to have fixed interest rates, and your new mortgage terms (often 15-30 years) start fresh.

Key Benefits:

• Fixed-rate stability with predictable payments
  
• One consolidated loan rather than a second lien
  
• May offer lower total interest over time depending on rate environment
  

Five-Year Cost Comparison: HELOC vs. Cash-Out Refinance Over $500K

Let’s analyze an example scenario:

Key Takeaways:

• HELOC wins short-term: If your plan is to repay quickly or invest elsewhere temporarily, the lower monthly payments of a HELOC may be attractive.
  
• Cash-out wins long-term: If you plan to stay in your home and carry the loan for 10+ years, a fixed-rate refi offers security and potentially lower cumulative costs.
  

Tax Implications

• HELOC Interest Deduction: Only tax-deductible if funds are used for home improvement.
  
• Cash-Out Refi Interest: May be tax-deductible on the entire mortgage if used to buy, build, or improve your home.
  

Always consult with a tax advisor to understand how IRS rules apply to your situation.

When to Choose an Interest-Only HELOC

Choose an interest-only HELOC if:

• You need short-term liquidity.
  
• You want flexibility in how and when you draw funds.
  
• You anticipate paying off the balance quickly or refinancing again within 5–7 years.
  

When to Choose a Cash-Out Refinance

Opt for a cash-out refinance if:

• You plan to stay in your home long-term.
  
• You prefer the predictability of fixed payments.
  
• You want to lock in low rates and consolidate debt.
  

Frequently Asked Questions (FAQ)

Read Next

• How Long Does It Take to Get a HELOC?
  
• Tapping Home Equity Cash-Out Refinance Home Equity Loan

Final Thoughts

Choosing between an interest-only HELOC and a cash-out refinance for a $500K+ scenario depends on your financial goals, time horizon, and risk appetite. A short-term project or flip might benefit from the low initial payments of a HELOC, while a cash-out refinance offers more stability and predictability in long-term planning.

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

Check Rates