Cash-out refi vs HELOC

If you’ve built up equity in your home and need cash (for a remodel, college tuition, paying off higher-interest debt), you have three primary tools: a cash-out refinance, a home equity line of credit (HELOC), or a home equity loan (HELOAN). Plus the always-available fourth: a personal loan secured by nothing.

Picking the right one depends almost entirely on your existing mortgage rate.

The three home-secured options

Cash-out refinance

Replace your existing mortgage with a new, larger one. Take the difference in cash.

• Rate: today’s rate (whatever the market is)
• Closing costs: 2–4% of the new total loan
• Tax-deductible: only on the cash-out portion if used to “buy, build, or substantially improve” the home (TCJA)
• Maximum LTV: typically 80% on conventional cash-out

HELOC (Home Equity Line of Credit)

Open a revolving credit line secured by your home. Borrow as needed, pay interest only during the draw period (typically 10 yrs), then a repayment period (typically another 10 yrs) where you pay back principal + interest.

• Rate: variable (Prime + a margin), can rise and fall
• Closing costs: typically $0–500
• Tax-deductible: same TCJA rule as cash-out (must be used to improve the securing home)
• Combined LTV cap: typically 85% (some lenders 90–95%)
• Your existing first mortgage stays untouched

HELOAN (Home Equity Loan)

A fixed-rate, fixed-term second mortgage paid out as a lump sum.

• Rate: fixed
• Closing costs: low, similar to HELOC
• Tax treatment: same as HELOC
• Use case: same as HELOC but you want predictable payments and you know exactly how much you need

Personal loan (the unsecured fourth option)

Not secured by your home. Higher rate but no risk to the property.

• Rate: 7–30%+ depending on credit
• Closing costs: usually none
• Tax-deductible: no
• Term: 24–84 months typical

The rate trap

If your existing mortgage rate is well below today’s rate, a cash-out refi is almost always wrong, even if the cash-out rate looks lower than the HELOC rate.

A cash-out refi replaces your entire mortgage at the new rate. You borrow the new $50k cash at 7%, and you also re-price the existing $300k balance from 4% to 7%.

A HELOC keeps your existing low-rate first mortgage untouched. Even at a higher HELOC rate, you’re only paying that higher rate on the new cash, not on the entire balance.

Concrete example:

• Current mortgage: $300k at 4.25%, 24 yrs left → $1,663/mo P&I
• Today’s cash-out refi rate: 6.75%
• Today’s HELOC rate: 8.5%
• Cash needed: $50k

Cash-out refi math:

• New loan: $356.5k (existing + $50k + $6.5k closing)
• New monthly P&I: $2,313 (over 30 yrs)
• Lifetime interest on the entire new loan: ~$476k

HELOC math:

• Existing mortgage stays at $1,663/mo
• HELOC payment on $50k @ 8.5% over 20 yrs: ~$434/mo
• Total monthly: $2,097
• Lifetime interest on the existing mortgage: ~$179k (you finish paying the existing 4.25% loan)
• Lifetime HELOC interest: ~$54k
• Total: ~$233k

The HELOC saves ~$243,000 in lifetime interest even though its headline rate is 1.75% higher than the refi. That’s the rate trap.

The Cash-Out vs HELOC vs Personal Loan calculator runs all three options side-by-side with your numbers and warns you when the rate trap applies.

When each option wins

Cash-out refi wins when…

• Your existing rate is higher than today’s refi rate. Then refi saves on the existing balance too.
• You want to combine the cash-out with rate-and-term improvement (drop PMI, shorten/lengthen term).
• You want a single fixed-rate payment, no variable-rate risk.

HELOC wins when…

• Your existing rate is lower than today’s rates (the common case in 2024-2026 after the rate spike).
• You don’t know exactly how much you’ll need (HELOC is a credit line, not a lump sum).
• You expect to pay it off relatively quickly (1–5 yrs) and the variable rate isn’t a big concern over that horizon.

HELOAN wins when…

• Same setup as HELOC, but you want fixed payments.
• You know exactly how much you need.

Personal loan wins when…

• The amount is small enough that closing costs on a HELOC/refi outweigh the rate difference.
• You don’t want to put your home at risk.
• You don’t qualify for a home-secured option (insufficient equity).

Tax deductibility (TCJA)

Under the 2017 Tax Cuts and Jobs Act (a rule the 2025 One Big Beautiful Bill Act made permanent), mortgage interest (including cash-out and HELOC interest) is only deductible if the proceeds are used to buy, build, or substantially improve the home securing the loan.

So:

• Use a HELOC to remodel your kitchen → deductible
• Use the same HELOC to pay off credit cards → not deductible
• Use the same HELOC to fund a vacation → not deductible
• Use a HELOC on home A to remodel home B → not deductible

Personal loan interest is never deductible.

The deduction is also subject to the standard-deduction floor. If your total itemized deductions don’t exceed the standard deduction, the deduction is worth $0 to you. The Refinance and Rent vs Buy calculators model this; the Cash-Out vs HELOC calculator uses a simpler model that assumes itemizing.

What about a 0% credit card?

If the amount is small ($5–15k) and you can pay it off within the intro period (typically 12-21 months), a 0% balance-transfer card can beat all of these options on cost. Watch for the transfer fee (typically 3-5%) and the post-intro rate.

Common mistakes

• Falling for the rate trap. Always compare against keeping your existing low-rate mortgage intact.
• Underestimating HELOC variable-rate risk. Prime can move 2-3% in a year. The model assumes today’s rate; reality won’t.
• Not factoring in closing costs. Refis have real closing costs; HELOCs sometimes don’t. Personal loans never do.
• Conflating tax deductibility with deduction value. You only get the value if you itemize and your itemized deductions exceed the standard deduction.
• Borrowing against home equity for discretionary spending. You’re trading liquid emergency funds (paid off the credit card) for an illiquid asset (home equity). Sometimes worth it; usually a warning sign.

Related tools

• Cash-Out Refi vs HELOC vs Personal Loan: the main analysis
• Refinance Breakeven for rate-and-term refi questions
• Home Equity to see how much equity you have
• Mortgage Recast: the alternative if you have a lump sum to put in, not take out

For specific term definitions, see the glossary.