HELOC vs. home equity loan vs. cash-out refinance: which one fits
Three ways to turn equity into cash. The right one depends on your current mortgage rate, how you want the money, and how much. Three questions below sort it out.
Here is the short version of HELOC vs home equity loan vs cash-out refinance. If your current first mortgage has a low rate, keep it and add a second lien. If you want the money as one lump sum and you want a payment that never changes, that second lien is a home equity loan. If you want to draw money as you need it over several years and only pay interest on what you have taken, that second lien is a HELOC, which stands for home equity line of credit. If you do not have a low rate worth protecting, and the amount you need is large, a cash-out refinance that replaces your whole first mortgage can make sense. Everything below explains why, with the same $80,000 worked three ways so you can compare home equity options on real numbers.
The tool below asks you the three questions and points you to a product. Answer it honestly. It is not an application and nobody sees your answers.
Side by side
The three products differ in what they do to your existing mortgage, how the money arrives, and how the payment behaves over time. This table lays them out. Costs are described relative to each other because the actual dollar amounts depend on your loan size, your property and your state.
| Question | HELOC | Home equity loan | Cash-out refinance |
|---|---|---|---|
| What happens to your current mortgage | Nothing. It stays in first position at its current rate and payment. | Nothing. It stays in first position at its current rate and payment. | It is paid off and replaced with a new, larger first mortgage. |
| How you get the money | A revolving credit line you draw from as needed during the draw period, commonly 10 years. | One lump sum at closing. | One lump sum at closing, the difference between the new loan and the old payoff, less costs. |
| Rate type | Variable, tied to the prime rate plus a margin. Some programs allow a fixed-rate lock on a draw. | Commonly fixed for the life of the loan. | Fixed or adjustable, your choice, on the whole new balance. |
| How the payment behaves | Changes with the rate and with your balance. Many programs allow interest-only during the draw period, then the payment steps up for repayment. | Same amount every month until it is paid off. | One new payment replaces your old one. Fixed if you chose a fixed rate. |
| Typical term | Draw period around 10 years, then a repayment period of roughly 10 to 20 years. | 10 to 30 years, fully amortizing. | Usually 15 or 30 years, restarting from today. |
| Closing costs | Lowest of the three. Often a lighter appraisal and title process. Some programs carry an annual fee or an early closure fee. | Low to moderate. Costs scale with the second-lien amount, not your whole mortgage. | Highest of the three. Costs are charged on the entire new first mortgage, including the part you already owed. |
| Best for | Ongoing projects, a standby reserve, or an amount you cannot pin down yet. | A known amount with a fixed payment, while keeping a low first-mortgage rate. | Large amounts when your current rate is not worth keeping, or when you want one payment and a fresh term. |
HELOC: borrow as you go, and watch the end of the draw period
A home equity line of credit works like a credit card secured by your house. The lender approves a limit. You draw against it when you need money and pay interest only on the balance you are carrying. During the draw period, commonly 10 years, many programs let you pay interest only, which keeps the monthly cost low. You can pay the balance down and draw it again. For a kitchen this year, a roof in three years, and a cushion for whatever comes after, a HELOC matches how the money actually leaves your hands. The full walk-through is on how a HELOC works.
Where it goes wrong is the end of the draw period. The line closes, and whatever you owe converts to a fully amortizing payment over the repayment period. If you paid interest only for ten years on a large balance, the payment steps up, sometimes sharply, because you are now paying principal and interest on a shorter clock. Add a variable rate to that, and a payment you got comfortable with can look very different in year eleven. People who treat a HELOC as a permanent balance instead of a line they pay down tend to get surprised. The fix is simple. Know your repayment-period payment before you draw, and pay principal during the draw even when you are not required to.
Home equity loan: one check, one fixed payment, and the risk of over-borrowing
A home equity loan, which lenders call a HELOAN, is the simpler second lien. You borrow a set amount at closing, the rate is commonly fixed, and you pay it off on a schedule of 10 to 30 years with the same payment every month. Your first mortgage is not touched. If you have a first mortgage in the 3s or low 4s and you need $60,000 for a specific purpose, this is usually the cleanest answer. You know the cost on day one. The details are on how a home equity loan works.
Where it goes wrong is sizing. Because the money arrives all at once, people round up. They need $50,000 for the project and take $75,000 because the lender approved it and it felt safer to have extra. From the first payment, they are paying interest on $25,000 sitting in a savings account earning less than the loan costs. A HELOC solves that problem by only charging for what you draw. A home equity loan does not. Borrow what you have a plan for, and if the plan is fuzzy, the line may be the better tool.
Cash-out refinance: a new first mortgage, and the old rate is gone
A cash-out refinance pays off your current first mortgage and replaces it with a bigger one. The difference between the new loan and the old payoff, after costs, comes to you as cash. You end up with a single mortgage, a single payment, and a term that restarts at 15 or 30 years. Lenders commonly cap a cash-out refinance at 80% loan-to-value. If your existing rate is higher than what is available today, or you want to consolidate the whole picture into one loan, this can be the right move. Our broader guide on how to pull equity out of your home covers when it makes sense.
Where it goes wrong is the trade. Most homeowners who bought or refinanced between 2020 and early 2022 are holding a first mortgage under 4%. A cash-out refinance gives that rate up on the entire balance, not just the cash you are pulling. You also reset the clock. If you are eight years into a 30-year loan, a new 30-year loan puts you back at month one, and the early years of any mortgage are mostly interest. The cash-out might look cheaper per dollar borrowed, because first-mortgage rates are usually lower than second-lien rates, but you are repricing money you had already borrowed cheaply. That is why second liens have grown so much while refinancing has slowed. The worked example below shows the gap in dollars.
The same $80,000, three ways
Say you owe $310,000 on a 30-year first mortgage at 3.25%, and you want $80,000. Rates below are hypothetical, chosen for the example only, and are not a quote from us or anyone. What matters is the shape of the comparison.
Assumptions, all hypothetical for the example: HELOC at 8.5% variable, interest-only during the draw period. Home equity loan at 8.75% fixed over 20 years. Cash-out refinance at 6.75% fixed over 30 years, new balance $390,000 replacing the $310,000 loan at 3.25%. Closing costs left out to keep the math clean.
HELOC, $80,000 drawn. Interest-only at 8.5% is $80,000 × 0.085 ÷ 12, which is $566.67 a month while the draw period lasts and the rate holds. None of that reduces the balance. If you draw only $40,000, the cost is half.
Home equity loan, $80,000. Amortized over 20 years at 8.75%, the payment is $706.97 a month, every month, until it is paid off. Each payment reduces the balance.
Cash-out refinance, new $390,000 first mortgage. At 6.75% over 30 years, the new payment is about $2,529.50 a month. Your old payment on $310,000 at 3.25%, on the original 30-year schedule, was about $1,349.15. The increase is roughly $1,180 a month. That is the real monthly cost of getting $80,000 this way, because $310,000 you were paying 3.25% on now costs 6.75%.
Bottom line: on these assumptions, the $80,000 costs about $567 a month as a HELOC, about $707 a month as a home equity loan, and about $1,180 a month as a cash-out refinance. The refinance is the most expensive by a wide margin, even though its rate is the lowest, because the low rate applies to a balance that was already cheaper. Change the old rate to 7% and the picture flips, which is exactly why your current rate is the first question.
Two things to keep in mind with those numbers. The HELOC payment is the only one that moves. If the prime rate rises a point, it moves up. If the draw period ends with the full $80,000 still outstanding, the payment converts to principal and interest and goes up further. The home equity loan payment is higher than the HELOC on day one, but it is also paying the loan off. By year 20 the home equity loan is gone and the HELOC, if you only ever paid interest, still owes $80,000.
If your first mortgage rate is below what is available today, the cost of a cash-out refinance is not its rate. It is the difference between the new rate and the old one, applied to your entire balance.
Self-employed or rental property?
Everything above assumes you qualify on standard income documentation, which for most people means W-2s, pay stubs and tax returns. Two groups often do not fit that box and get told no by lenders who only have one program.
If you are self-employed and your tax returns show less income than your business actually brings in, because you write off everything you legally can, there is a home equity loan qualified on bank deposits instead of tax returns. Twelve months of business bank statements are the income documentation. Read how it works on the bank statement home equity loan page.
If the property is a rental you do not live in, there is a second mortgage qualified on the property's rent rather than your personal income. It uses the debt service coverage ratio, or DSCR, which is the gross monthly rent divided by the full property payment. It is a business-purpose loan for investment property only. Read the details on the DSCR second mortgage page.
Because Unified Home Loans brokers to wholesale lenders and also lends as a correspondent, we can route a file to whichever program it fits instead of forcing it into the one we happen to have.
If you want to see where rates sit before you decide, the rate watch below follows the index that HELOCs move with and the fixed rates that home equity loans and refinances are priced against.
Questions people ask
Is a HELOC or a home equity loan better?
Neither is better across the board. A home equity loan fits when you know the amount and want a fixed payment. A HELOC fits when the amount is uncertain or spread out over time, and you accept a variable rate in exchange for only paying interest on what you have drawn.
Can I have both a HELOC and a home equity loan?
It is possible but uncommon. Both are liens behind your first mortgage, and together they have to fit under the lender's combined loan-to-value cap. Most lenders will only take second position, so the one you open second would be a third lien, which few programs allow. In practice you pick one.
Which has lower closing costs, a HELOC, a home equity loan, or a cash-out refinance?
Second liens generally cost less to open than a cash-out refinance because they are smaller loans and often use a lighter appraisal and title process. A HELOC usually has the lowest upfront cost of the three, a home equity loan is in the middle, and a cash-out refinance costs the most because the fees are charged on the entire new first mortgage.
Which is fastest to close?
Second liens typically close faster than a cash-out refinance. A HELOC or home equity loan involves a smaller loan and fewer moving parts. A refinance has to pay off and replace your existing first mortgage, which adds steps. Actual timing depends on the lender, the appraisal, and how quickly documents come in.
If I take a HELOC or home equity loan now, can I refinance later?
Yes. You can refinance the first mortgage and either pay off the second with the new loan or ask the second-lien lender to subordinate, which means agreeing to stay in second position behind the new first. You can also refinance the second lien on its own, or roll both into one new first mortgage.
What if rates drop after I choose?
A HELOC rate floats with the prime rate, so a drop in rates lowers your payment on its own. A fixed home equity loan or cash-out refinance stays where it is, but you can refinance either one if the savings justify the cost. If you kept a low first mortgage and added a second, you are in a flexible spot either way.
Does a second lien affect selling my house?
It is paid off at closing out of your sale proceeds, the same as your first mortgage. Escrow orders a payoff for each lien and sends the balance to you. A second lien does not block a sale as long as the sale price covers both loans and closing costs.
What is a fixed-rate HELOC?
Some HELOCs let you lock a fixed rate on part or all of what you have drawn, so that portion pays like a small home equity loan while the rest of the line stays variable and reusable. It is a hybrid. The lock usually carries a rate slightly different from the variable rate, and the terms vary by program.
Still torn? Run the real numbers.
The equity calculator shows how much each path could give you.