Cash Out Refinance vs. HELOC: Which is Right for You?
Key Takeaways
- HELOCs and cash out refis each carry unique risks that you should know.
- Cash out refinances offer stability with a predictable monthly mortgage payment.
- HELOCs provide ongoing access to equity you can borrow against as needed.
- Maintaining a 20% equity cushion helps protect you against market volatility.
Before You Tap Your Equity, Decide Which Loan Option Is Right for You
Your home is often considered your biggest asset because you can access your home’s equity to do things like pay for college, get cash for home improvements, or consolidate high-interest debt. By borrowing against the value of your home's equity, you can get cash when you need it.
There are two main ways to do this: a cash out refinance or home equity line of credit (HELOC). Each comes with different benefits and trade-offs, so it helps to understand how they work to make a confident decision about which is best for you.
At a Glance: Cash Out Refi vs. HELOC Key Differences
A cash out refi and a HELOC let you tap into your home equity, but in different ways:
| Feature | Cash Out Refinance | HELOC |
|---|---|---|
| How You Receive Funds | Lump-sum cash from a new, larger mortgage | Revolving line of credit you can draw from as needed or as a lump sum upfront |
| Interest Rates | Fixed rate based on current market conditions | Fixed rate options or variable rate that can increase or decrease |
| Repayment Period | 15–30 year term that may reset your mortgage timeline | 5–10 year draw period and followed by a 10–20 year repayment period |
| Loan Structure | Replaces your existing mortgage | Second loan added on top of your mortgage |
| Upfront Costs | Closing costs typically 2–6% of the loan amount | Lower upfront costs, but may come with higher variable rates |
| What It’s Best For | Large, one-time expenses or locking in a fixed rate | Ongoing or flexible expenses without changing your mortgage |
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What Is a Cash Out Refinance?
A cash out refinance is a type of mortgage refinancing that allows you to replace your primary mortgage with a new, larger one and take the difference in cash. Homeowners often use a cash out refi to access the equity they’ve built up for expenses like home improvements, debt consolidation, or other major costs. Because it typically comes with a fixed interest rate and a single monthly payment, it’s a good option if you know exactly how much money you need.
For example, if your current mortgage balance is $250,000 and you’re approved for a new $300,000 loan, you’ll receive the difference of $50,000 at closing (minus closing costs) and begin repaying your new loan.
Cash Out Refinance Pros and Cons
A cash out refinance has benefits and drawbacks you’ll want to consider before applying:
| Pros of a Cash Out Refinance | Cons of a Cash Out Refinance |
|---|---|
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What Is a HELOC?
A HELOC is a type of loan that allows you to borrow from your available home equity without affecting your current mortgage.
There are different types of HELOCs.
A traditional HELOC offers a revolving line of credit with a variable rate. It allows borrowers to access money as needed throughout the draw period and to make interest-only payments during the draw period. This offers lower payments from the start, but higher payments later.
Freedom Mortgage's HELOC provides a lump sum up front, and the interest rate is fixed. You pay interest and principal from the start. You can also borrow again during the draw period as you pay down your balance. Your rate on new draws will be determined at the time you borrow.
Each of these HELOCs offers flexible access to funds for ongoing or uncertain expenses. However, since the loan is secured by your home, failing to repay the HELOC could put your property at risk.
HELOC Pros and Cons
Just like the cash out refi, HELOCs have their own pros and cons:
| Pros of a HELOC | Cons of a HELOC |
|---|---|
|
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Cash Out Refi vs. HELOC Interest Rates
Interest rates for a cash out refinance and a HELOC depend on your qualifications. For example, a high credit score and a low DTI may offer you a better rate. It’s also important to understand that these loan types are typically structured differently:
- Cash out refinance: A cash out refi is a fixed-rate loan, so it will have the same rate throughout the life of the loan, keeping your monthly payment more predictable.
- HELOC: Rates on a HELOC are often higher than on a cash out refinance because this is a second mortgage and your primary mortgage lender has first claim on the house in case of foreclosure. Some HELOCs have a variable rate, so payments can change over the life of the loan. Freedom Mortgage's HELOC has a fixed rate loan.
A cash out refinance gives you a lump sum of money from your equity that you’re free to use with a stable interest rate, but you’ll have a new mortgage that may have extended terms.
A HELOC gives you flexibility but rates may be higher than a cash-out refinance and, in some cases are variable.
When Should You Choose a HELOC vs. a Cash Out Refinance?
When choosing how to tap into your equity, you’ll want to consider your short-term and long-term goals. The better option depends on how you plan to use your home equity. A cash out refi may be better if you need a large lump sum and want predictable payments, while a HELOC may be a better fit if you need flexible access to funds over time.
Your needs and goals are ultimately what will help you decide between a HELOC or cash out refinance:
Get a HELOC if you…
- Want to access cash without getting a new mortgage.
- Need flexible borrowing for unknown expenses or emergencies.
- Want lower upfront costs (some lenders offer no closing costs in exchange for a higher interest rate).
Get a cash out refinance if you…
- Know exactly how much money you need.
- Want to secure a fixed interest rate.
- Want to consolidate your debts.
- Have a large, one-time expense you need to pay.
Final Thoughts on HELOCs vs. Cash Out Refinances
Ultimately, the biggest difference between a HELOC and a cash out refinance lies in how you access your home’s equity. A HELOC offers more flexibility and you don't change the terms of your current loan, while a cash out refinance only provides a lump sum of cash and replaces your current mortgage.
Understanding these key differences can help you choose the right option for your financial goals. Get started with a HELOC or cash out refinance with us at Freedom Mortgage today.
Victoria Araj is the Senior Director, Managing Editor at Freedom Mortgage. In her 20 years of working for top mortgage lenders, she’s held roles in mortgage banking, public relations, editorial content, and more. She has a bachelor’s degree in Journalism with an emphasis in Political Science from Michigan State University, and a master’s degree in Public Administration from the University of Michigan. She has spoken at several industry conferences, where she’s discussed the importance of editorial content for brands.
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