HELOC vs. cash-out refinance: how to choose
A HELOC is a line of credit that sits behind your current mortgage, so your first mortgage and its rate stay in place. A cash-out refinance replaces your current mortgage with a bigger one and gives you the difference in cash.
If you already have a low first-mortgage rate, a HELOC often lets you keep it. If you need one large lump sum, or your current rate is no longer one worth protecting, a cash-out refinance can be the simpler choice. Either way, your home is the collateral.
The difference in one sentence
With a cash-out refinance, the CFPB puts it plainly: you replace your existing mortgage with a bigger mortgage and take the difference in cash.1 A HELOC leaves that first mortgage alone and opens a separate, revolving line against your equity that you can draw from as you need it.2
Side by side
| HELOC | Cash-out refinance | |
|---|---|---|
| Your current mortgage | Stays in place, same rate and balance | Paid off and replaced by a new, larger loan |
| How you get the money | A line you draw from when you need it | One lump sum at closing |
| You pay interest on | Only what you draw | The entire new loan balance |
| Rate type | Usually variable; some programs offer fixed options | Fixed or adjustable, on the whole balance |
| Lien position | Second, behind your first mortgage | First |
| Often a fit for | Renovations in stages, a down payment on a rental, flexibility | One large need, or a first mortgage you'd replace anyway |
When a HELOC usually makes more sense
- You have a low first-mortgage rate. A cash-out refinance would re-price your whole balance. A HELOC only touches the equity you borrow against.3
- You don't need it all at once. Renovations, tuition or a future down payment can be drawn as the bills come in, and you pay interest only on what you use.
- You want to keep options open. A line you don't draw on costs you little or nothing in interest, depending on the program.
- You invest. Some HELOC programs cover rental and investment properties, which can fund the down payment on your next door.
When a cash-out refinance can make more sense
- Your current rate isn't worth protecting. If today's options are close to or better than what you have, replacing the loan may be simpler.
- You need one large lump sum and prefer a single loan and a single payment.
- Your first mortgage is small or paid down. There's less of a low-rate balance to give up.
The CFPB also notes that a cash-out refinance can extend the time it takes to pay off your home and can raise your monthly payment, so run the full picture, not just the cash amount.4
Florida costs to ask about
Florida charges state taxes when a new mortgage is recorded: a documentary stamp tax on the note5 and a nonrecurring intangible tax on the mortgage.6 Both options can carry closing costs, title work and a valuation. Ask for a written cost estimate on both options before you choose, and compare the total cost, not just the headline amount.
The risk both share
Both are secured by your home. In the CFPB's words, if you fall behind or can't repay the loan on schedule, you could lose your home.2 Borrow for things that build value or reduce more expensive debt, and only what you're confident you can repay.
Frequently asked questions
Does a HELOC replace my current mortgage?
No. A HELOC is a separate line of credit that sits behind your first mortgage. Your first mortgage, its rate and its balance stay where they are.
Does a cash-out refinance replace my current mortgage?
Yes. A cash-out refinance pays off your current mortgage with a new, larger loan, and you take the difference in cash. The new rate applies to the whole new balance.
Which one is better if I have a low mortgage rate?
Often a HELOC, because it lets you keep that low first-mortgage rate and borrow only against your equity. A cash-out refinance would re-price your entire balance at today's rate. The right answer still depends on how much you need, your plans for the home and the full cost of each option.
Can I use a HELOC on a rental property?
Some HELOC programs cover non-owner-occupied properties. Investment and business-purpose loans are also not limited to Florida the way owner-occupied lending is.
Is my home at risk with either option?
Yes. Both a HELOC and a cash-out refinance are secured by your home. If you can't repay, you could lose the property, so borrow only what you are confident you can pay back.
Not sure which one fits? I'll run both.
Tell me what the money is for and a ballpark home value. I'll compare a HELOC and a cash-out refinance for your situation and tell you straight which one makes sense, or if neither does.
Serves Tampa, Orlando, Miami and all of Florida, and works with real estate investors nationwide. Born in Puerto Rico; Spanish is his first language. He works with four HELOC programs and 290+ lenders through NEXA Mortgage.
Sources and further reading
- CFPB, What other types of loans are similar to a HELOC? consumerfinance.gov
- CFPB, What is a home equity line of credit (HELOC)? consumerfinance.gov
- CFPB Office of Research, A look at cash-out refinance mortgages and their borrowers between 2013 and 2023. consumerfinance.gov
- CFPB, Older Americans housing guide: using your home equity. consumerfinance.gov (PDF)
- Florida Statutes §201.08, documentary stamp tax on promissory notes. leg.state.fl.us
- Florida Statutes §199.133, nonrecurring intangible tax on obligations secured by a mortgage. leg.state.fl.us