Cash Out Refinance vs. HELOC: Compare Your Options

Cash-out refinancing replaces your existing mortgage

With a cash out refinance, the new rate generally applies to the full replacement loan, not just the extra cash. With a HELOC, keep the current first mortgage in the comparison and add the line’s cost. Comparing only the two advertised rates misses this difference.

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A hypothetical starting point

Suppose you owe $250,000 on the first mortgage and need $50,000. A cash out scenario starts with about $300,000 of replacement debt before fees and other adjustments. A HELOC scenario keeps the $250,000 first mortgage and adds a $50,000 line balance if that amount is drawn. Neither illustration establishes available equity or eligibility.

Use the same comparison date

At a shared future year, compare payments made, fees, interest and balances still owed. Include early sale or payoff. A smaller monthly payment with a larger balance left can be useful for cash flow, but it is a different outcome from reducing total cost.

Test the risks specific to each option

For the HELOC, model higher rates and the change from draw to repayment terms. For refinancing, include repricing the existing balance and restarting or extending the term. For both, the home secures the debt. Failure to repay can put the home at risk.

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Keep no new borrowing on the screen

Compare waiting, saving, direct debt repayment or using an appropriately sized amount of available cash. The right question is what problem you are solving and whether the benefit justifies the cost, reduced flexibility and risk.

Do not compare APR alone

APR is calculated differently for a HELOC and a closed end mortgage. The HELOC figure generally leaves out fees that a mortgage APR includes. Put fees, payments and the remaining debt side by side instead of choosing the lower APR.

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