Cash-Out Refinance vs. HELOC: Which Is Right for You?

Cash-out refinances give you access to a large one-time payout while HELOCs offer revolving lines of credit.

By Micah Murray

Written by

Freelance writer

Micah Murray has over six years of experience in personal finance. His work has been published by Newsweek Vault, New York Post, and Bankrate.

Edited by Reina Marszalek

Written by

Reina Marszalek

Former senior editor

Reina Marszalek has more than 10 years of experience in personal finance and is a former senior mortgage editor at Credible.

Updated February 14, 2025

Editorial disclosure: Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to here as “Credible.”

Key takeaways:

Cash-out refinances replace your existing mortgage and pay you out the difference in cash.
HELOCs give you access to a revolving line of credit, similar to a credit card, for a set period of time.
Which option is best for you depends on factors like what you need the funds for and when you plan to use the money.

There are many reasons you might need to tap into the equity you’ve built in your home, such as an emergency home repair or to pay for college tuition. Two of the most popular methods to access your home equity are a cash-out refinance and a home equity line of credit (HELOC). Both these options have upsides and drawbacks, so carefully consideri which one is best for your situation.

What is a cash-out refinance?

A cash-out refinance is a type of mortgage loan that replaces your existing home loan with a larger one and pays you the difference in one lump sum. For example, if you need to borrow $50,000 and you have a current mortgage of $200,000, you’d need to take out a $250,000 cash-out refinance loan. However, it is possible to get a cash-out refinance on a paid-off home.

Note:

Cash-out refinance loans can be used to cover almost any expense, including home improvements and consolidating debt.

What is a HELOC?

A HELOC is a common financing method that lets you leverage your home equity for cash.

Unlike traditional home loans, HELOCs offer a revolving line of credit you can spend from as needed over a set draw period, up to a predetermined limit. During this time, you’ll typically only be responsible for interest payments, but this varies from lender to lender.

After the draw period, you’ll no longer be able to use your credit line and must repay what you borrowed on your credit line plus interest.

Note:

Since HELOCs use your home as collateral, it’s important to remember that if you fail to repay your loan you might face foreclosure.

How do cash-out refinances and HELOCs differ?

Although cash-out refinances and HELOCs can be used to access your home equity, they have many differences. A cash-out refinance is paid out in one lump sum while a HELOC gives you access to a revolving line of credit that you can pull from as needed.

Here are some of the most important features of cash-out refinances and HELOCs:

	Cash-out refinance	HELOC
Payout method	Lump sum payment	Line of credit
Replaces original mortgage?	Yes	No
Loan terms	15 to 30 years, but varies by lender	20 to 30 years (typically a 10 year draw period with a 10 or 20 year repayment period)
Interest rate type	Often fixed, but variable options available	Usually variable
Repayment	Fixed monthly payments over the life of the loan	Interest-only payments during the draw period; principal and interest payments after draw period

Pros and cons of cash-out refinance

When considering if a cash-out refinance is for you, it’s important to keep these pros and cons in mind:

Pros of cash-out refinance

Lump sum payout: Cash-out refinance are paid out to you in one large lump sum, making them ideal if you need a large amount of cash to cover an expense.
Fixed monthly payments: Most cash-out refinances come with fixed interest rates that result in predictable monthly payments.
Repayment terms up to 30 years: Cash-out refinances often come with repayment terms up to 30 years, letting you spread out your payments over a long period of time.
Possible tax benefits: If you use your cash-out refinance to pay for home improvements you might be able to deduct your interest payments.

Cons of cash-out refinance

Increased debt burden: Cash-out refinances replace your original mortgage loan, meaning you’ll owe more on your mortgage than before and extend the amount of time it takes to repay your mortgage.
You’ll pay closing costs: Cash-out refinances come with closing costs that amount to approximately 2% to 5% of the loan cost.
Foreclosure risk: Since they are secured by your home, if you don’t repay your cash-out refinance loan you risk having your home foreclosed on.

Pros and cons of HELOCs

Getting a HELOC is a big financial move. Before you do it, consider these pros and cons carefully:

Pros of HELOCs

Borrow as needed: During the draw period, which typically lasts 10 months, you can access your HELOC funds as needed.
Interest-only payments during draw period: During the draw period, many HELOC lenders only require you to pay the cost of accrued interest.
Potential tax benefits: If you use your HELOC to pay for home improvement expenses, you might be able to deduct the interest you paid on your taxes.
Separate from your mortgage: HELOCs are taken out in addition to your mortgage. This is helpful if you have a low rate because you won’t replace it, like you would with a cash-out refinance.
Lower closing costs: HELOCs typically have lower closing costs than cash-out refinance loans.

Cons of HELOCs

Variable interest rates: HELOCs often come with variable rates, making monthly payments less predictable.
Equity requirements: To get a HELOC you’ll need to own more equity than you want to borrow against, limiting how much you can borrow.
Foreclosure risk: HELOCs are secured by your home, so you’ll be at risk of losing your home to foreclosure if you fail to repay your loan.

When should you choose a cash-out refinance or HELOC?

Whether a cash-out refinance or a HELOC is best for you depends on how you plan to spend the money and how much equity you’ve built in your home. If you have a large one-time expense to cover, a cash-out refinance might be the better option for you. On the other hand, if you need funds to cover a project with an extended timeline that requires multiple purchases, a HELOC may be a better choice.

You’ll also want to consider which option best fits your budget. “In both cases, the repayment terms and interest rate dictate what your monthly payments will be,” says Omer Reiner, a licensed REALTOR® in Florida. “Keep in mind that [with a HELOC] you will still be paying offn your original home loan if you have a balance on that, so weigh that debt against how much you borrow against the equity.”

Cash-out refinance vs. HELOC FAQ

Is a cash-out refinance better than a HELOC?

Open

Whether a cash-out refinance is better than a HELOC will depend on your financial situation and what you need the money for. Specifically, cash-out refinances are best if you need a large sum of money quickly, while a HELOC is best if you want to access your equity over a period of time.

Can you use a HELOC to pay off a cash-out refinance?

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Some lenders may allow you to use a HELOC to pay off a cash-out refinance. However, many lenders don’t allow this, partly because a cash-out refinance already leverages your home equity and a HELOC would increase the lender's risk of not being paid back.

Which option is better for home renovations?

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Choosing a HELOC or a cash-out refinance will depend on how you plan to tackle your renovations. Since HELOCs offer a line of credit similar to a credit card, they are best for home projects that you plan to complete in phases, such as a kitchen remodel. A cash-out refinance gives you a lump sum that is ideal for large one-time expenses, such as replacing your roof or purchasing a new furnace.

How do interest rates compare between a cash-out refinance and a HELOC?

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Interest rates for cash-out refinances are often lower than HELOC interest rates and are usually fixed. This means they have more predictable monthly payments than HELOCs, which are typically variable. However, interest rates for both products vary and you’ll want to carefully consider which is best for you.

Are there any tax benefits for either option?

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Yes, HELOCs and home equity loans come with potential tax benefits, but your eligibility depends on how you use the money and the tax year. Specifically, from 2018 to 2025, you can only deduct paid interest if the loan is used to buy, build, or significantly improve your home. You should contact a tax expert to learn how a HELOC or home equity loan could affect your specific tax situation.

Meet the expert:

Micah Murray