Cash-out refinance vs HELOC

A cash-out refinance replaces your first mortgage with a larger one. You receive the difference between the new loan and what you owed, minus costs, as cash. The new loan often has a fixed rate and a new 15- or 30-year term.

It can make sense to look at when you also want to change the rate or term on the existing mortgage. It is a poor fit when you only need a small or uncertain amount of cash, because you are rewriting the entire first mortgage to get it.

A home equity line of credit, or HELOC, is usually a second lien. During a draw period you can borrow up to a limit, repay, and borrow again. The rate is often variable, so the payment can change. After the draw period, many HELOCs convert to a repayment phase and the payment rises.

A home equity loan is also usually a second lien, but you receive a lump sum at a fixed rate and repay it on a set schedule. You do not have a revolving line.

Compare the interest rate on your current first mortgage with the rate a cash-out loan would carry. If the first mortgage is already inexpensive, replacing it to pull out cash can raise the rate on the whole balance. A second lien leaves the first mortgage in place and puts a new payment on top.

Both products use the house as collateral. Closing costs, the combined loan-to-value ratio, and whether the rate is fixed or variable are the comparisons that matter. Lenders set the limits. This site does not.