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Understanding the Basics: Cash-Out Refinance vs. HELOC
When you need to tap into your home equity, two popular options are a cash-out refinance and a home equity line of credit (HELOC). Both have advantages and disadvantages, but the right choice depends on your financial goals, interest rate trends, and overall market conditions. Here’s a detailed breakdown to help you decide which might be a better fit for you in today’s market.
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What is a Cash-Out Refinance?
A cash-out refinance allows you to replace your current mortgage with a new, larger one, receiving the difference in cash. This approach is often used to consolidate debt, fund home renovations, or invest in other properties. You’re essentially resetting your mortgage, which can be a positive or negative depending on your situation.
Key Features:
- Lump sum cash payout
- Fixed or adjustable interest rates
- Potentially lower overall interest rate if market conditions are favorable
- Typically longer loan terms (15-30 years)
🔗 Learn more about Cash-Out Refinance
What is a HELOC?
A HELOC is a revolving line of credit secured by your home. It works much like a credit card, giving you flexibility to borrow, repay, and borrow again as needed during the draw period (typically 5-10 years). It’s a popular choice for ongoing projects or emergency funds.
Key Features:
- Flexible, ongoing access to funds
- Variable interest rates (though some fixed-rate options exist)
- Interest-only payments during the draw period
- Can be a second lien, meaning you keep your first mortgage
Key Differences: Cash-Out Refinance vs. HELOC
| Feature | Cash-Out Refinance | HELOC |
| Interest Rates | Typically lower, fixed | Often variable, can be higher |
| Access to Funds | Lump sum | Revolving line of credit |
| Closing Costs | Similar to a first mortgage | Typically lower, but still present |
| Impact on First Mortgage | Replaces it | Keeps it intact |
| Repayment Structure | Fixed monthly payments | Interest-only options available during draw period |
Pros and Cons of Each Option
Pros of Cash-Out Refinance
- Potentially lower interest rates
- Long repayment terms
- Consolidate multiple debts into one payment
Cons of Cash-Out Refinance
- Higher closing costs
- Longer loan commitment
- Resets your mortgage term
Pros of HELOC
- Flexibility to borrow as needed
- Typically lower initial costs
- Interest-only payment option during draw period
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
Cons of HELOC
- Variable rates can increase payments
- Requires strong home equity position
- Second lien can complicate future refinancing
Which Option is Best in 2025?
Choosing between a cash-out refinance and a HELOC largely depends on current interest rates, your financial goals, and how much flexibility you need. As rates fluctuate, a HELOC may be better for short-term needs, while a cash-out refinance might offer a more stable, long-term solution.
🔗 Use our Refinance Calculator to see what you might save.
FAQs
Which option has lower interest rates?
Cash-out refinances generally offer lower, fixed rates compared to HELOCs, which often have variable rates.
Is a cash-out refinance harder to qualify for?
It can be, as lenders assess your income, credit score, and home equity. HELOCs might have more lenient qualification standards, but still require solid credit and equity.
Which is better for debt consolidation?
Cash-out refinances are often better for consolidating larger debts due to fixed rates and longer repayment terms.
Read Next
Ready to unlock your home’s potential? Find out if a cash-out refinance or HELOC is right for you. Start today with our Home Equity Loan to Pay Off Debt Guide.
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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.
