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HELOC vs cash-out refinance
Both turn home equity into cash. One keeps the mortgage you have and adds a line beside it; the other pays it off and replaces it with a bigger loan at today’s rate. Here is the math, with your numbers.
The one question that decides it
Compare your current mortgage rate with today’s refinance rate. A cash-out refinance moves your whole balance to the new rate. A HELOC moves only the cash. If your existing rate is low, every dollar you already owe is cheaper left where it is, and the line costs more only on the new money.
That is why the answer has flipped in the last few years. When rates were falling, a cash-out refinance often lowered the rate on the old balance and delivered cash. Today, most California homeowners with a 2019 to 2022 mortgage would raise the rate on their entire balance to get the cash.
A worked example
Take a $850,000 home with $420,000 owed at 3.25%, about 25 years left, and an owner who needs $150,000. The combined balance would be $570,000, or 67% of the value, within our 90% limit.
| Keep the mortgage, add a HELOC | Cash-out refinance | |
|---|---|---|
| Loan amounts | $420,000 first at 3.25% plus $150,000 line at 7.49% | One $570,000 loan at 7.125% (7.192% APR) |
| Payment during the draw period | $2,047 first + $936 line, interest only = $2,983 | $3,840 (30-year P&I) |
| Payment once the line repays | $2,047 first + $1,207 line over 20 years = $3,254 | $3,840 (unchanged) |
| Monthly interest, first year | $2,074 | $3,384 |
| Rate you pay overall | 4.37% blended | 7.125% (7.192% APR) |
| Closing costs | Modest, on the line only | Full refinance costs on the whole loan |
| Rate type | First stays fixed; line is variable | Fixed for 30 years |
Refinance rate and APR are today’s priced 30-year fixed par pricing for a sample $640,000 Ventura County purchase, 780 credit, 30-day lock, no points; a cash-out refinance prices higher. Examples only, not an offer of credit. HELOC at the 7.49% starting rate, interest only during the draw. Your rates depend on credit, CLTV and property. The HELOC payment rises once principal payments begin or if the rate rises.
In this example the HELOC route costs about $1,311 less in interest every month, and it avoids refinance closing costs on $570,000.
The blended rate test
The quickest way to compare is the blended rate: the average of both loans, weighted by balance. Here it is ($420,000 × 3.25% + $150,000 × 7.49%) ÷ $570,000 = 4.37%. If that is below the cash-out refinance rate, keeping the first and adding a line costs less in interest. The table shows how the answer changes with your current rate.
| Your current rate | Blended with a HELOC | Interest: HELOC route | Interest: cash-out | Lower cost |
|---|---|---|---|---|
| 3% | 4.18% | $1,986/mo | $3,384/mo | HELOC |
| 4% | 4.92% | $2,336/mo | $3,384/mo | HELOC |
| 5% | 5.66% | $2,686/mo | $3,384/mo | HELOC |
| 6% | 6.39% | $3,036/mo | $3,384/mo | HELOC |
| 7.125% | 7.22% | $3,430/mo | $3,384/mo | Cash-out |
When a HELOC wins
- Your first mortgage rate is well below today’s. The bigger the gap, the more the HELOC saves.
- You need the money over time. Remodels, ADUs and tuition get drawn as bills arrive, so interest starts only when you use it.
- You expect to pay it back within a few years, from a bonus, a sale or a business payout.
- You want low closing costs and to keep your loan’s remaining term instead of restarting 30 years.
When a cash-out refinance wins
- Your current rate is close to or above today’s rate. Then refinancing costs little or nothing on the existing balance.
- You need a large amount and will carry it for many years. A fixed 30-year rate removes the variable-rate risk.
- You want to remove mortgage insurance or an adjustable rate on the first loan at the same time.
- You want one payment rather than two loans to manage.
If you want the HELOC’s structure but a fixed rate, a closed-end second mortgage sits in between: the first stays put, and the second is a fixed-rate lump sum.
Let us run both
Mike prices both options for your actual balance, rate, remaining term and credit, with closing costs itemized, so the decision rests on real numbers rather than rules of thumb.
Costs that do not show up in the rate
Rate is not the only difference. A cash-out refinance restarts a 30-year clock on the whole balance. If you were 5 years into your current loan, you add those 5 years back, and the extra interest over the life of the loan can outweigh a small monthly saving. A refinance also carries full closing costs (title, escrow, appraisal and lender charges) on the entire new loan, while a HELOC’s costs apply only to the line.
On the other side, a HELOC’s rate is variable. If the prime rate rises, the interest on what you have drawn rises with it, and once the 10-year draw period ends the line converts to principal and interest over 20 years, which raises the payment. Borrowers who plan to carry a large balance for a long time should weigh that, or look at a fixed-rate second.
A simple way to decide
- Find your blended rate using your current balance and rate plus the cash you need at the HELOC rate.
- Compare it with today’s cash-out rate. Lower blended rate: the HELOC route costs less in interest.
- Think about how long you will carry the cash. Short term favors the line; long term, large amounts favor a fixed loan.
- Add closing costs and the term reset to the picture before deciding.