Financial decision
Both turn equity into cash. Only one of them puts your existing mortgage rate at risk.
If you bought or refinanced when rates were low, the single most important question is whether tapping equity forces you to give up the rate you already have. A home equity line of credit sits behind your first mortgage and leaves it alone. A cash-out refinance replaces it entirely.
At a glance
A revolving second lien secured by your home. You are approved for a credit limit, draw only what you need, and pay interest only on the balance you actually use. Rates are usually variable.
A brand-new first mortgage that pays off your existing loan and returns the difference to you in cash at closing. One loan, one payment, a new rate on the whole balance.
| Factor | HELOC | Cash-Out Refinance |
|---|---|---|
| What happens to your current rate | Untouched | Replaced by today's rate |
| Interest charged on | Only what you draw | The entire new loan balance |
| Rate type | Usually variable | Usually fixed |
| Closing costs | Low or none | Full mortgage closing costs |
| Repayment structure | Draw period, then repayment period | Fixed amortization |
| Best when your first-mortgage rate is | Lower than today's market | Higher than today's market |
If your current mortgage rate is better than today's market, a cash-out refinance is not a loan — it is a trade, and you are giving up the better half.
Plain English first, then the rule as it is published, then what it means for your file.
“The maximum LTV, CLTV, and HCLTV ratios for a cash-out refinance of a one-unit principal residence are 80%.”
You must leave at least 20% equity in the home. On a $500,000 home with a $300,000 balance, the most you could take out before costs is roughly $100,000.
“For a cash-out refinance, the property must have been owned by at least one borrower for at least six months prior to the disbursement date of the new loan.”
A recent purchase generally cannot be cash-out refinanced right away. A HELOC has no comparable agency seasoning rule, though individual lenders set their own.
“You can deduct home mortgage interest only if the loan proceeds are used to buy, build, or substantially improve the home that secures the loan.”
Using equity to consolidate credit cards or pay tuition is often the right financial call, but do not budget for a tax deduction that will not exist.
Your existing first mortgage rate is below today's market, you need the money in stages (a renovation paid in draws), or you want to keep closing costs near zero.
Today's rates are at or below your current rate, you need a large lump sum at once, or you want the certainty of one fixed payment instead of a variable line.
The comparison is not really HELOC versus cash-out. It is whether the rate on your existing mortgage is worth protecting. Protect it with a HELOC when it is; consolidate with a cash-out refinance when it is not.
Many lenders waive them, but some recapture a few hundred dollars if you close the line within the first two or three years. Ask for the early-closure clause in writing.
Yes. The HELOC lender must agree to remain in second position, a step called subordination. It is routine but adds time and a small fee.
A HELOC often closes in two to four weeks with a lighter appraisal. A cash-out refinance is a full mortgage transaction, typically three to six weeks.
Every rule stated on this page is traceable to the agency handbook that governs it. Guidelines change — confirm anything time-sensitive with a licensed loan officer before acting on it.
Reviewed by Brian Mix, licensed loan officer (NMLS #111175) · Last checked July 2026.
Ask RED. It can walk through your specific numbers, explain any term on this page, and point you to the guide that goes deeper — no credit pull, no sales pressure.
Ask REDDone with this guide?
Head back to the Knowledge Center to keep learning.