HELOC vs Cash-Out Refinance When Your Mortgage Rate Is Low
Both a home equity line of credit (HELOC) and a cash-out refinance turn part of your home's equity into cash, and both are secured by your home: if you cannot repay, you could lose it. The difference is what happens to the mortgage you already have. A HELOC sits on top of it as a second lien. A cash-out refinance pays it off and replaces it with a larger loan at today's rate. If your current rate is well below today's rates, that one fact usually decides the comparison, and this page shows the arithmetic.
Partner disclosure. Loans Generator may be paid through an affiliate network when you click or submit a request through the offer link on this page. This does not change what we report.
Key takeaways
- A cash-out refinance reprices your whole mortgage balance, not only the cash you take. The CFPB says to "carefully consider the interest rate, especially if it is higher than the interest rate on your current mortgage."
- A HELOC leaves your first mortgage and its rate in place, but the HELOC rate is usually variable.
- In our illustration (hypothetical rates, stated below), keeping a 3.25% mortgage and adding a $50,000 HELOC costs less per month and leaves far less debt after 10 years than a $300,000 cash-out refinance.
- Both put your home at risk. The CFPB: "If you fall behind or can't repay the loan on schedule, you could lose your home."
How do a HELOC and a cash-out refinance differ?
The CFPB describes a cash-out refinance this way: "you replace your existing mortgage with a bigger mortgage and take the difference in cash. Often, you have to pay closing costs." A HELOC, in the CFPB's words, is "an 'open-end' line of credit that allows you to borrow repeatedly against your home equity," usually with a draw period (10 years is the CFPB's example) followed by a repayment period.
| Factor | HELOC | Cash-out refinance |
|---|---|---|
| Your existing mortgage | Stays in place, same rate and term | Paid off and replaced |
| Rate type | Usually variable, per the CFPB | Fixed or adjustable, depending on the loan you choose |
| How you get the money | Draw as needed up to the limit during the draw period | One lump sum at closing |
| What the new rate applies to | Only the amount you draw | The entire new loan, including the old balance |
| Upfront costs | Can include application, appraisal and closing fees; some plans add annual or early cancellation fees | Full mortgage closing costs (for scale, the CFPB found median total loan costs of $5,954 on 2022 home purchase loans) |
| Payment pattern | Can rise with the rate and again when repayment starts | Fixed for the life of a fixed-rate loan |
| Lien position | Second lien behind your first mortgage | One first lien |
| Loan-to-value limits | Set by each lender | Conventional loans sold to Fannie Mae: 80% maximum on a one-unit principal residence |
| Right to cancel | 3 business days on a plan secured by your principal dwelling (12 CFR 1026.15) | 3 business days. If the lender that originally made your current loan, or a lender that later merged with or acquired that lender, refinances it, only the new money is rescindable (12 CFR 1026.23(f)(2) and its official interpretation); with any other lender, including one that bought or services your loan, the whole refinance is rescindable |
| Home at risk if you cannot pay | Yes | Yes |
The CFPB's research office adds a point the table cannot show: "a cash-out refinance with a higher interest rate than the prior paid-off mortgage could effectively lead to much higher borrowing costs, relative to the original mortgage or to other sources of credit, like home equity loans or home equity lines of credit, that do not raise the interest rate on the existing first-lien loan balance."
What does each option cost? A worked illustration
This is an illustration, not an offer or a quote. Every rate and fee below is a hypothetical input we chose to show the structure.
Assumptions. Home value $500,000. Existing mortgage: $250,000 balance at 3.25% fixed with 264 months (22 years) left; principal and interest $1,326.74 a month. Cash needed: $50,000.
- Option A, keep the mortgage and add a HELOC. $50,000 drawn at once at a hypothetical 8.00% variable APR (the bank prime rate was 7.00% on October 22, 2026, per the Federal Reserve, plus an assumed 1.00-point margin), repaid in equal payments over 120 months. Assumed HELOC closing costs: $1,000. Hypothetical maximum rate (cap) under the plan: 18.00% APR; hypothetical fees to open the plan: $1,000.
- Option B, cash-out refinance. New $300,000 loan at a hypothetical 7.25% fixed interest rate for 360 months. Assumed closing costs: $9,000, paid at closing. APR 7.56%, assuming all $9,000 of costs are finance charges. If some of them are not (appraisal and title fees usually are not), the APR is lower. For context, Freddie Mac's survey average for a 30-year fixed-rate mortgage was 7.32% as of October 22, 2026 (an average for purchase loans, not an offer; your rate will differ).
Payments are principal and interest only. They do not include taxes and homeowners insurance, so your actual payment will be higher. All figures round interest and payments half-up to the cent each month.
| Option A: keep 3.25% mortgage + HELOC | Option B: cash-out refinance | |
|---|---|---|
| Monthly payment, first 10 years | $1,326.74 + $606.64 = $1,933.38 | $2,046.53 |
| Every payment on the new borrowing | HELOC: 119 payments of $606.64 and a final payment of $606.20, if the rate stays at 8.00% | 359 payments of $2,046.53 and a final payment of $2,044.96 (fixed rate) |
| If the HELOC rate were 10.00% throughout | HELOC payment $660.75 (119 payments, final $661.54); total $1,987.49 | No change |
| Interest paid in the first 10 years | $67,235.95 + $22,796.36 = $90,032.31 | $204,514.44 |
| Assumed closing costs | $1,000.00 | $9,000.00 |
| Debt owed after 10 years | $158,027.15 (HELOC paid off) | $258,930.84 |
| Years until the mortgage is paid off | 22 (unchanged) | 30 (reset) |
Figure: Hypothetical rates (3.25% existing mortgage, 8.00% variable HELOC repaid over 10 years, 7.25% fixed 30-year cash-out). Excludes closing costs, taxes and insurance. Bars in each panel use their own scale.
Why Option A wins here: the cash-out refinance moves $250,000 that was costing 3.25% to 7.25%. The blended rate on Option A's $300,000 of debt is ($250,000 × 3.25% + $50,000 × 8.00%) ÷ $300,000 = 4.04%, against 7.25% on all $300,000 in Option B. Even if the HELOC rate rose to 10.00% for the full 10 years, Option A's interest would be $67,235.95 + $29,290.79 = $96,526.74, still far below Option B.
Part of Option B's higher interest comes from structure, not only rate: it stretches the debt back to 30 years. Held to the same 22 years left on the old mortgage, the same $300,000 cash-out at 7.25% (APR 7.62%, assuming the same $9,000 of costs are all finance charges; higher than 7.56% because the costs are spread over 264 payments instead of 360) would cost $2,276.68 a month (263 payments, then a final payment of $2,276.71), pay $191,744.16 in interest in the first 10 years and leave $218,542.56 owed. That is still $101,711.85 more interest than Option A, with a payment $343.30 a month higher.
What would change the answer:
- Your current rate is close to or above today's rates. Then the refinance is not giving up a cheap loan, and a single fixed payment may cost less than a variable second lien.
- You need a large amount for many years. A HELOC's variable rate and the jump when repayment starts carry more risk the longer you carry a big balance.
- You would pay the HELOC interest-only. Interest stays well below Option B, but the balance does not shrink. On interest-only payments of $333.33 a month for 10 years (120 payments, if the rate stays at 8.00%), Option A's interest would be $67,235.95 + $39,999.60 = $107,235.55, and you would still owe $158,027.15 + $50,000.00 = $208,027.15 when the draw period ends, with the HELOC payment then rising. See home equity loan vs HELOC for that payment pattern.
To test your own numbers on a refinance, use the refinance break-even calculator. The full list of HELOC fees, including fees some lenders charge if you close the line early, is in HELOC closing costs and fees.
What does a lender check for each one?
For a cash-out refinance, the rules are published for loans sold to Fannie Mae. Its Selling Guide (B2-1.3-03, dated 12/10/2025) says an existing first mortgage being paid off "must be at least 12 months old," and that at least one borrower "must have been on title for at least for six months" before the new loan closes. Its Eligibility Matrix caps a cash-out refinance on a one-unit principal residence at 80% loan-to-value. FHA and VA have their own limits. All of these are covered in cash-out refinance requirements.
Pricing also differs. Fannie Mae's loan-level price adjustment matrix (updated September 30, 2026) charges lenders more for cash-out loans than for refinances that take no cash. For a 740 to 759 credit score at 75.01% to 80% loan-to-value, the adjustment is 2.375% of the loan amount for a cash-out refinance and 1.125% for a limited cash-out refinance. Lenders generally pass these through in the rate or points they quote. The difference between the two refinance types is explained in cash-out vs rate-and-term refinance.
HELOC lenders set their own combined loan-to-value, credit and income rules, and they vary widely by lender.
Is the interest deductible?
Only in part, and on the same terms for both. IRS Publication 936 says interest on home equity loans and lines of credit is deductible only if the money is used to "buy, build, or substantially improve" the home that secures the loan. For a refinance, Publication 936 says the new debt counts as home acquisition debt "only up to the amount of the balance of the old mortgage principal just before the refinancing." Cash you take out and spend on anything other than the home does not qualify, qualifying debt is limited to $750,000 of combined mortgage debt ($375,000 if married filing separately) for debt taken on after December 15, 2017, and the deduction only helps if you itemize.
Which one fits?
A HELOC tends to fit when your current mortgage rate is well below today's rates, you need a moderate amount, and you can repay it on a schedule you set yourself rather than the minimum. A cash-out refinance tends to fit when your current rate is near or above market, you want one fixed payment, or you need a large sum you will carry for a long time. In both cases your home is the collateral.
Before you apply for either: your home secures a HELOC and a cash-out refinance. If you cannot repay, you could lose your home. No lender can promise you approval, a rate, or a lower total cost. Loans Generator may be paid through an affiliate network when you click or submit a request through the link below; this does not change what we report.
Common questions
Is a HELOC cheaper than a cash-out refinance?
Often, when your current mortgage rate is lower than today's rates, because a HELOC does not reprice your existing balance. In our illustration the HELOC route paid $90,032.31 in interest over 10 years against $204,514.44 for the cash-out refinance. When your current rate is close to today's rates, the answer can flip.
Does a cash-out refinance reset my mortgage term?
It usually does. A new 30-year loan starts a new 30-year schedule, even if you had 22 years left. You can ask for a shorter term, which raises the payment.
Can I cancel either one after signing?
Federal rules give you until midnight of the third business day to rescind a HELOC or a refinance secured by your principal dwelling. Business days for this purpose include Saturdays (12 CFR 1026.2(a)(6)). If the lender that originally made your current loan, or a lender that later merged with or acquired that lender, refinances it, the right applies only to the new money you borrow, per Regulation Z's official interpretation of 1026.23(f); with any other lender, including one that bought or services your loan, the whole refinance is rescindable.
Which is riskier?
Both put your home at risk if you cannot pay. A HELOC adds variable-rate risk and a possible payment jump when repayment starts. A cash-out refinance adds a larger balance and, if the rate is higher, a larger payment. Research cited by the CFPB found that a typical cash-out refinance had a longer loan term and a larger monthly payment than the mortgage it replaced. Read can you lose your home over a HELOC before you borrow.
What is a blended rate?
The average rate across all your mortgage debt, weighted by balance. Multiply each balance by its rate, add the results, and divide by the total balance. It lets you compare a first mortgage plus a HELOC with a single refinanced loan.
Sources
- Consumer Financial Protection Bureau, "What other types of loans are similar to a HELOC?", accessed October 26, 2026.
- Consumer Financial Protection Bureau, "What is a home equity line of credit (HELOC)?", last reviewed August 28, 2026, accessed October 26, 2026.
- Consumer Financial Protection Bureau, Office of Research blog, "A look at cash-out refinance mortgages and their borrowers between 2013 to 2023", accessed October 26, 2026.
- Consumer Financial Protection Bureau, Office of Research, "Data Point: 2022 Mortgage Market Activity and Trends" (September 2023), accessed October 26, 2026.
- Consumer Financial Protection Bureau, Regulation Z, 12 CFR 1026.2(a)(6), 12 CFR 1026.15 and 12 CFR 1026.23 with official interpretations, accessed October 26, 2026.
- Fannie Mae, Selling Guide B2-1.3-03, Cash-Out Refinance Transactions (12/10/2025), accessed October 26, 2026.
- Fannie Mae, Loan-Level Price Adjustment Matrix, updated September 30, 2026, accessed October 26, 2026.
- Freddie Mac, Primary Mortgage Market Survey, weekly averages as of October 22, 2026, accessed October 26, 2026.
- Board of Governors of the Federal Reserve System, H.15 Selected Interest Rates, release of October 23, 2026, accessed October 26, 2026.
- Internal Revenue Service, Publication 936 (2025), accessed October 26, 2026.
- Consumer Financial Protection Bureau, “Office of Research blog: A look at cash-out refinance mortgages and their borrowers between 2013 to 2023”
- Consumer Financial Protection Bureau, “Regulation Z, 12 CFR 1026.2(a)(6) Business day”
- Consumer Financial Protection Bureau, “Regulation Z, 12 CFR 1026.15 Right of rescission (open-end credit)”
- Consumer Financial Protection Bureau, “Regulation Z, 12 CFR 1026.23 Right of rescission (closed-end credit)”
- Fannie Mae, “Loan-Level Price Adjustment Matrix (updated September 30, 2026)”
- Freddie Mac, “Primary Mortgage Market Survey, U.S. weekly averages as of 10/22/2026”
- Board of Governors of the Federal Reserve System, “H.15 Selected Interest Rates (Daily), October 23, 2026”
- Internal Revenue Service, “Publication 936 (2025), Home Mortgage Interest Deduction”
Loans Generator is not a lender or mortgage broker. Rates in this page's examples are hypothetical illustrations, not offers; averages cited are labeled as averages and are not offers. No lender can guarantee approval, a rate or a payment. Rules and figures cited here were checked on October 26, 2026 and change without notice. Availability and terms vary by lender and by state. This page is general information, not legal, tax, or financial advice.