HELOC vs cash-out refinance
A home equity line of credit (HELOC) is a revolving line you draw on as you need it, and your first mortgage stays exactly as it is. A cash-out refinance replaces your mortgage with one new, larger loan and pays you the difference at closing. Which fits depends on whether you want to keep your first mortgage and how you will use the money.
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Keep your mortgage, or replace it
Both turn the equity in your home into money you can use. The difference is what happens to the mortgage you have now.
A HELOC sits behind your existing first mortgage, which stays as it is. During a draw period you draw what you need, repay and draw again, and the required payment covers only the interest on what you have drawn. The rate is variable, so the payment can change. When the draw period ends, the balance is repaid over a repayment period.
A cash-out refinance pays off your mortgage with a new, larger one, and the difference comes to you at closing. You have one loan and one payment, at a fixed or an adjustable rate depending on the loan you choose. Because the new loan is larger and secured by your home, weigh the total cost over the life of the loan, not just the cash you receive or the monthly payment.
At a glance
- HELOC: a revolving line against your equity, drawn as you need it; variable rate; your first mortgage stays.
- Cash-out refinance: one new, larger mortgage in place of the old one; the cash is paid once, at closing.
- A third option: a fixed-rate second mortgage pays one lump sum at a rate that does not change and also leaves your first mortgage in place.
HELOC and cash-out refinance compared
The questions that separate a line of credit from a new first mortgage.
| Question | HELOC | Cash-out refinance |
|---|---|---|
| Your first mortgage | Stays exactly as it is; the line sits behind it, or is the first lien on a home you own outright | Paid off and replaced by one new, larger loan |
| How you get the money | As you need it during a draw period, up to a limit set from your equity; most programs ask for a large first draw at closing | Once, at closing, after the old mortgage and any debts you choose to clear are paid off |
| The rate and payment | Variable, moving with a published index; interest only on what you have drawn during the draw period, then the balance is repaid | Fixed or adjustable, depending on the loan you choose; one payment on one loan |
| How income is shown | Documented the usual way, with pay stubs, W-2s or tax returns; some programs can use payroll or bank data links | Pay stubs and tax returns, or for some programs bank statements, assets or rental income |
| What the lender checks | The home’s value, what is owed on it, your credit and your income; smaller lines may need only an automated valuation | The home’s current value by appraisal (some conventional loans get a waiver), how long you have owned it, your credit, income and debts |
| Property types | A primary residence, a second home and, in some programs, a rental; not a manufactured home | The home you live in, through conventional, FHA and VA programs; second homes and rentals within each program’s limits |
| Who it suits | Homeowners who want to keep their first mortgage and need money over time | Homeowners who want one loan and one payment, or want to change the terms of their first mortgage as well |
| Typical uses | Costs that come in stages, such as a renovation paid as the work is done | Home improvements, paying off debts, tuition, or buying another property |
When a HELOC fits better
When you want to leave your first mortgage alone and borrow as you go.
- You want to keep your first mortgage. A line sits behind the mortgage you have, which stays exactly as it is.
- Your costs come in stages. For a renovation paid as the work is done, you draw as you go and pay interest only on what you have drawn.
- You may need the money again. During the draw period you can repay and draw again, up to the limit.
- You bought recently. Some line-of-credit programs need no ownership seasoning, and a line can also be opened at the same closing as a new first mortgage.
- You can live with a payment that moves. The rate follows a published index, so the payment can rise or fall.
When a cash-out refinance fits better
When you would rather have one loan, and the mortgage you have now is not one you need to keep.
- You want one loan and one payment. The new mortgage replaces the old one, so there is no second loan to manage.
- You want to change your first mortgage anyway. A refinance lets you change its terms and take cash in the same closing.
- You need the whole amount at once. Debts you choose to clear, such as credit cards or student loans, are paid at closing and the rest comes to you.
- You want a rate that can be fixed. A cash-out refinance can carry a fixed rate on the whole loan; a line of credit is variable.
- Your loan is FHA or VA. Conventional, FHA and VA loans all offer a cash-out refinance on the home you live in, each with its own rules.
How to choose between them
Look at the mortgage you have
If you want to keep it as it is, a line of credit or a second mortgage leaves it in place. If you want to change it anyway, a cash-out refinance does both at once.
Decide how you will spend it
Money needed over time points to a line you draw on. One known amount, needed now, points to a lump sum.
Choose how much change you can carry
A line’s variable rate means its payment moves. A fixed rate keeps the payment set, on a cash-out refinance or a fixed-rate second mortgage.
Compare the total cost
Try the HELOC calculator and the refinance calculator, then ask a loan officer to lay the options side by side.
Questions about HELOCs and cash-out refinances
What is the difference between a HELOC and a cash-out refinance?
A HELOC is a revolving line against your equity that sits behind your first mortgage, which stays as it is; you draw as you need it at a variable rate. A cash-out refinance replaces your mortgage with one new, larger loan and pays you the difference once, at closing.
Does a HELOC change my first mortgage?
No. A line sits behind your existing first mortgage, which stays exactly as it is. If you own the home outright, the line can be in first position. A cash-out refinance, by contrast, pays your first mortgage off.
Which suits a home renovation?
It depends on how the bills arrive. If the work is paid in stages, a line lets you draw as you go and pay interest only on what you have drawn. If you know the full cost now, or want to change your first mortgage as well, a cash-out refinance pays it in one sum at closing.
Can a cash-out refinance pay off a HELOC?
Yes. At closing, the new loan can pay off the old mortgage and other debts you choose, including a home equity line, leaving one loan to pay. Because the debts move into a longer loan secured by your home, compare the total cost, not just the monthly payment.
Will I need an appraisal for either one?
A cash-out refinance usually needs one, though some conventional loans get a waiver. Some lines of credit need no appraisal: an automated valuation is enough on smaller lines, while larger lines get a full appraisal.
Is there another way to keep my first mortgage and get a fixed rate?
Yes. A fixed-rate second mortgage gives you one lump sum at closing, repaid in equal monthly payments at a rate that does not change. Like a line of credit, it sits behind your first mortgage, which stays as it is.
Not sure which way to tap your equity?
Get a quote, apply online, or ask a licensed loan officer to lay a line of credit and a cash-out refinance side by side.
This page is general information, not a commitment to lend. Programs, terms and eligibility depend on credit, income, property and underwriting review and are subject to change without notice.
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