HELOC vs. Cash-Out Refinance: Which is Better for Homeowners?

What Is a HELOC?

A Home Equity Line of Credit (HELOC) is a flexible, revolving form of credit that uses your home as collateral. It's considered a second mortgage, which means it doesn't replace your existing home loan—instead, it sits on top of it.

HELOCs give borrowers the ability to access funds over time rather than all at once, making them ideal for ongoing or variable expenses like home repairs, tuition, or unexpected life costs.

Unlike a traditional loan, a HELOC works more like a credit card: you have a maximum limit, you can borrow and repay repeatedly within that limit, and you only pay interest on the amount you’ve actually borrowed.

Two Phases of a HELOC

1. Draw Period (typically 10 years): You borrow as needed and make interest-only payments.

2. Repayment Period (10-20 years): The line closes, and you begin paying back principal plus interest.

HELOCs traditionally come with higher interest rates than first mortgages, so if you’re keeping your existing first mortgage intact, it’s important to consider what your overall 'blended' rate would be with both loans combined (check out Scenario #3 in the example below)

What Is a Cash-Out Refinance?

A cash-out refinance replaces your current mortgage with a brand new one—usually for a larger amount. The difference between what you owe and what the new loan is worth comes to you in cash at closing.

Let’s say your home is worth $500,000 and you owe $300,000. You could refinance into a new loan for $400,000, pay off the $300,000, and walk away with $100,000.

This option gives you one new loan, one monthly payment, and one interest rate.

It’s a clean solution that allows you to reset your mortgage terms—whether that means lowering your interest rate, shortening your loan term, or both. For borrowers looking to simplify their finances, a cash-out refinance consolidates everything into a single payment and can often offer better rates than personal loans or credit cards. Just keep in mind that you’re increasing your total mortgage balance, so it’s important to weigh the long-term costs against the short-term benefits.

Key Similarities

Before we dive into the differences, let’s quickly cover where these two tools overlap:

• They both use your home equity as collateral.

• You can typically borrow up to 80–85% of your home’s value.

• There are no restrictions on how the money is used. However we always recommend smart, strategic uses like investing in the home or eliminating high-interest debt.

• Both carry risk. If you default on either loan, foreclosure is a possibility, which is no different than the requirement to keep up with payments on your current home loan.

HELOC vs. Cash-Out Refinance: What’s the Difference?

Let’s unpack each of these in more detail:

Loan Structure

HELOC: This is a separate, second lien on your home. You keep your original mortgage untouched. If you already have a low rate, a HELOC lets you borrow without disturbing that.

Cash-Out Refinance: Your original mortgage is replaced with a new one. That means new terms, new rate, and new payment schedule.

Interest Rates

HELOCs typically come with variable interest rates, which means your payment can rise or fall with market conditions. These rates are usually tied to the prime rate or another benchmark, and they can adjust monthly or quarterly depending on your loan terms. While variable rates can start off low, they can increase significantly over time—especially in an inflationary or high-rate environment.

HELOCs often do have rate caps like ARMs—limits on how much your rate can rise in a given period or over the life of the loan. Be sure to understand those caps and the margin added to the index when evaluating your options.

Cash-out refinances usually offer fixed rates, which means predictable monthly payments for the life of the loan. Fixed-rate mortgages are ideal for borrowers who value long-term stability. You know exactly what your payment will be every month, which helps with budgeting—especially when borrowing a large sum. Plus, if you’re consolidating variable-rate debt like credit cards, locking in a fixed mortgage rate can offer serious savings and peace of mind. Even though fixed rates on a cash-out refi might be higher than what your current mortgage offers, they are often still lower than unsecured loan rates or credit card APRs.

Your specific rate can also vary depending on the loan type. For example, VA loans often come with lower rates and no mortgage insurance, making them a strong option for eligible veterans. Conventional cash-out refis typically offer competitive rates but may include private mortgage insurance (PMI) if you're borrowing more than 80% of your home's value. For jumbo loans, which exceed conforming loan limits, rates may be slightly higher and guidelines more strict—but these loans can still be an efficient way to tap equity in high-value homes. The key is to work with a broker who can shop across all programs and tailor the strategy to your profile.

Access to Funds

Cash-Out Refi: You get a lump sum at closing—ideal for big, one-time expenses like paying off credit cards, buying an investment property, or a major renovation.

HELOC: You borrow as needed, when needed. This is perfect for ongoing or unpredictable expenses (like multiple home projects, medical costs, or tuition payments). Usually there's a minimum draw amount and a fee associated with each draw you take, so it’s important to understand the terms before you start borrowing.

Closing Costs

Cash-out refinances come with higher closing costs, typically 2% to 6% of the loan amount, since you’re starting a new mortgage. These costs usually include title insurance, escrow fees, an appraisal, credit report, recording fees, and lender charges—essentially everything involved in originating a brand-new loan.

However, thanks to LendFriend’s exclusive Rate Rebound program, our borrowers often see those costs reduced to just 1% to 3%. Better yet, we structure many of our refinances to allow you to roll those costs into the new loan, meaning no out-of-pocket expense at closing.

HELOCs, on the other hand, often have little to no closing costs. This makes them a lighter lift if you want quick access to equity with minimal upfront expense.

Monthly Payments

With a cash-out refinance, your monthly mortgage payment may go up depending on the new loan amount and interest rate. But you’ll only have one payment to manage. That single payment includes both principal and interest, and it's tied to a fixed schedule, so budgeting becomes straightforward. This makes a cash-out refi a great fit for borrowers who want predictability and don’t want to juggle multiple loans or variable payments.

A HELOC, on the other hand, adds a second payment, on top of your current mortgage. During the draw period, you may be able to make interest-only payments, which keeps monthly costs low at first. But once the repayment phase begins, you’ll have to pay both principal and interest, and payments can rise significantly. If you’ve drawn a substantial amount, the jump in required monthly payments can be a shock without proper planning. The good news? Some lenders offer fixed repayment options to smooth the transition, and working with a broker can help you lock in more favorable terms upfront.

Let's Look at Some Real-Life Scenarios

HELOCs and cash-out refinances aren’t one-size-fits-all solutions. The right move depends on your existing mortgage, your goals, and how you plan to use the funds. In some situations, the choice is clear. In others, it takes a little number crunching.

Scenario 1: You Have a 3% Mortgage and Need $50,000 for Home Improvements

👉 Go with a HELOC. Why? You don’t want to give up your ultra-low mortgage rate just to access some cash. A HELOC lets you borrow only what you need, and you keep your existing first mortgage intact.

Scenario 2: You’re Paying 6.75% and Want to Consolidate $75,000 in Credit Card Debt

👉 Consider a Cash-Out Refi. Why? If you can qualify for a better rate and roll high-interest debt into a new mortgage, the long-term savings can be substantial—even after factoring in closing costs.

Scenario 3: You Have a 5.5% Mortgage and Want to Invest $100,000

👉 Cash-Out Refi is the smarter play. Why? Your HELOC rate would be around 9%, a high hurdle if you're planning to invest in something like the S&P 500 or real estate. A cash-out refinance at 6% gives you cheaper capital and a fixed monthly payment. Even though your current mortgage rate is 5.5%, taking out a HELOC at 9% would bring your blended rate to approximately 6.25% (assuming a $500,000 balance and borrowing $100,000 more).

By refinancing the full $600,000 balance at a flat 6%, you not only get a lower blended rate but also the simplicity of one monthly payment and a lower overall borrowing cost. In this case, the refi wins on both math and peace of mind.

Scenario 4: You Own Your Home Free and Clear and Want to Tap $250,000

👉 Cash-Out Refi is the clear winner. Why? With no mortgage in place, a HELOC would add a new second lien with a variable rate and uncertain future payments. Instead, you can take out a single fixed-rate mortgage using a cash-out refinance, lock in today’s rates, and access your home equity without juggling two loans. You’ll gain a lump sum of capital and have just one predictable monthly payment.

This is especially powerful for homeowners looking to invest in real estate, a business, or the market. You’re essentially converting idle home equity into strategic opportunity—without touching a high-rate line of credit.

How LendFriend Helps You Choose

Let’s be honest: most big banks will try to push you toward whichever loan is easier for them—not what’s actually best for you.

At LendFriend, we shop both HELOC and cash-out refinance options across dozens of lenders. We help you compare:

• Fixed vs. variable interest rates

• Total borrowing costs

• Payment structures

• Closing timelines

• Long-term savings

We also work with alternative income borrowers, including self-employed clients, retirees, and those with significant assets but unconventional documentation. Need a bank statement HELOC or an asset depletion cash-out refi? We’ve got you covered.

HELOC vs. Cash-Out Refi: Quick Decision Guide

Final Thoughts: Tap Your Equity with a Plan

Your home is likely your largest asset—and your equity is one of the most powerful financial tools you have to continue to grow your net worth.

Whether a HELOC or a cash-out refinance is the right move depends on your goals, your mortgage, and your timeline. If you’re still unsure, we’re here to help.

At LendFriend, we don’t push products—we design strategies, schedule a call with me today or get in touch with me by completing this quick form, and discover how working with the right team can make all the difference.