HELOC vs home equity loan vs cash-out refinance

A HELOC or home equity loan fits when your first mortgage carries a rate you want to keep. A cash-out refinance fits when you would refinance anyway or want one loan instead of two. The choice turns mostly on what happens to your existing first mortgage, with fund timing and rate risk as the tiebreakers.

A home equity line of credit (HELOC) is a revolving credit line secured by your home that you draw from as needed, up to a set limit, during a draw period and then repay. Most HELOCs carry a variable rate built from an index plus a margin, so the rate and payment can change over the life of the line.

How do a HELOC, a home equity loan and a cash-out refinance compare?

All three turn home equity into cash, and all three put your home at risk if you cannot repay. A HELOC and a home equity loan are second liens that sit behind your current mortgage. A cash-out refinance pays off your current mortgage and replaces it with a bigger one, as the CFPB's HELOC booklet lays out.

Criterion	HELOC	Home equity loan	Cash-out refinance
Rate type	Usually variable: an index (often the prime rate) plus a margin	Usually fixed	Fixed or variable
How you receive funds	Draw as needed up to the limit; repaid amounts become available again	One lump sum at closing	One lump sum at closing, after the old mortgage is paid off
Effect on your first mortgage	Stays in place with its rate and term unchanged	Stays in place with its rate and term unchanged	Paid off and replaced by a new, larger first mortgage
Typical max CLTV/LTV	Some lenders allow up to 85% combined (Citizens Bank, for example)	Set by each lender on a combined basis	Fannie Mae: 80% for a 1-unit principal residence; 75% for 2-4 units, second homes and 1-unit investment; 70% for 2-4 unit investment
Closing cost norms	Often lower; some lenders waive some or all up-front costs	Similar fee types to a HELOC; varies by lender	Generally higher, since it is a full new first mortgage
Draw and repayment	Draw period (often 10 years), then repayment period (often 20 years)	Fixed term with equal payments that pay off the loan	A new full mortgage term, which can be longer than the time left on your current loan
Best for	Costs that arrive in stages, while keeping a low first-mortgage rate	One known cost and a predictable payment, while keeping your first mortgage	When a new first-mortgage rate is near or below your current one, or you want one payment

The cash-out caps come from the Fannie Mae Eligibility Matrix dated August 5, 2026. The 85% HELOC figure and the 10-year and 20-year periods come from Citizens Bank's public HELOC guidance. Every lender sets its own limits, and approval is subject to underwriting.

When does keeping your first mortgage make a second lien the better choice?

A second lien makes more sense when your current first-mortgage rate is lower than what a new first mortgage would cost today. A cash-out refinance reprices your entire balance at the new rate. A HELOC or home equity loan prices only the new money, so the debt you already have keeps its existing rate.

The table below is a hypothetical illustration, not an offer. It assumes a $600,000 home value and a $300,000 first-mortgage balance, and it uses the general caps above.

Hypothetical	HELOC at 85% combined	Cash-out refinance at 80% LTV
Maximum total debt on the home	$510,000	$480,000
Existing first mortgage	$300,000 stays in place	$300,000 paid off
Gross cash available before costs	Up to $210,000	$180,000
Debt priced at today's rates	Only what you draw, up to $210,000	The full $480,000

In the cash-out column, the $300,000 you already owed moves to the new rate along with the $180,000 of new money. If your current rate is well below today's rates, that repricing is the main cost of the cash-out route. If your current rate is close to or above today's rates, the repricing costs you little and a single loan can be simpler.

Timing rules can also decide it. Under Fannie Mae's cash-out guideline, at least one borrower must have been on title for 6 months before the new loan disburses. An existing first mortgage being paid off must generally be at least 12 months old. Fannie Mae also applies loan-level price adjustments to cash-out loans based on LTV and credit score.

How are HELOC rates set, and what is the variable-rate risk?

Most HELOC rates have two parts: an index and a margin the lender adds on top. The CFPB names the U.S. prime rate and the Constant Maturity Treasury rate as common indexes. When the index moves, your rate moves, and your payment can change even if you borrow nothing new.

The prime rate is set by individual banks. The Federal Reserve says it has no direct role in setting prime, but many banks set prime partly on the target for the federal funds rate set by the Federal Open Market Committee. The Fed's H.15 release reports the prime rate posted by most of the 25 largest banks. In practice, a change in the federal funds target often flows through to prime and then to prime-based HELOCs.

Some lenders offer an introductory rate that is unusually low for a short period, such as 6 months, according to the CFPB. The rate after that period ends is the one to plan around.

Before you choose a variable line, get these answers from each lender in writing:

• Which index the rate follows and what margin is added
• How often the rate can adjust
• The rate cap and floor over the life of the line
• What the rate becomes after any introductory period

Then test your budget at a rate meaningfully higher than today's. If a higher payment would strain you, a fixed-rate home equity loan may be the better fit.

How do the draw and repayment periods work?

A HELOC has two phases. During the draw period you can borrow, repay and borrow again up to your limit. During the repayment period you can no longer draw, and you pay down what you owe. Citizens Bank says these periods are often 10 and 20 years, though terms vary by lender.

The CFPB booklet describes several payment setups during the draw period. Some plans allow interest-only payments, so no principal is paid. Others set a minimum payment that includes some principal but typically does not repay the full balance by the end of the term. Some plans require the entire remaining balance at once, which is a balloon payment.

Repayment schedules often run over 10 or 15 years, per the CFPB. Moving from interest-only payments to principal-and-interest payments can raise your monthly cost sharply, so plan for that date from the start.

A home equity loan works differently. You get the full amount up front and repay it with equal payments over a fixed term. To borrow more later, you apply for a new loan.

Ask each lender how long the draw period lasts, how long repayment lasts, what the draw-period payment covers, and whether a balloon payment is possible.

What closing costs should you expect on each option?

A cash-out refinance generally costs the most to close because it is a complete new first mortgage. The CFPB's comparison table says cash-out closing costs are generally higher, and the booklet notes that some lenders waive some or all up-front HELOC costs. Home equity loan costs vary by lender and use similar fee types.

The CFPB lists these possible up-front costs on home-secured credit:

• Appraisal fee
• Application fee, which might not be refunded if you are turned down
• Points
• Attorney, title search, mortgage preparation and filing fees
• Property and title insurance, and taxes

HELOCs can also carry ongoing costs: an annual fee, a transaction fee per draw and an inactivity fee if the line goes unused. Check for early termination fees and prepayment penalties, especially if a lender waived your up-front costs.

The disclosures differ too. HELOC applicants do not receive a Loan Estimate or Closing Disclosure, so compare HELOC offers using the Truth-in-Lending disclosures each lender provides. A cash-out refinance comes with the standard Loan Estimate.

Is the interest on each option tax-deductible?

Interest on a HELOC or home equity loan is deductible only when the money is used to buy, build or substantially improve the home that secures the loan, according to IRS Publication 936. Home equity spent on a car or other personal expenses does not count as deductible home mortgage interest. The same use test applies to the extra cash taken out in a refinance.

The 2025 edition of Publication 936, for 2025 returns, sets these limits on the combined mortgages on your main home and second home:

Debt	Deduction limit	Married filing separately
Incurred on or after December 16, 2017	First $750,000 of qualifying debt	$375,000
Incurred before December 16, 2017	First $1,000,000 of qualifying debt	$500,000

You must itemize on Schedule A to take the deduction. Publication 936 also says debt not used to buy, build or substantially improve a qualified home is not home acquisition debt. If you use one loan for mixed purposes, the interest can be split, and the portion tied to business or investment use may be deductible elsewhere.

Keep records that tie each draw or disbursement to the improvement it paid for. Confirm your treatment with a tax professional before you count on the deduction.

Which option fits your situation?

Start with your first-mortgage rate and how you will spend the money. The list below pairs common situations with the option to compare first. Lender guidelines and underwriting then decide what is available to you.

1. Your first-mortgage rate is below today's rates and your costs arrive in stages, such as a phased renovation. A HELOC lets you draw only what you need and keeps your first mortgage intact.
2. Your first-mortgage rate is below today's rates and you have one known cost. A home equity loan gives you a lump sum and a fixed payment without touching your first mortgage.
3. Your current rate is close to or above today's rates. A cash-out refinance can replace the old loan and fund your cash need in one new first mortgage.
4. You want a single monthly payment and accept a new loan term. A cash-out refinance does that, at the cost of higher closing costs.
5. A rising payment would strain your budget. A fixed-rate home equity loan or a fixed-rate cash-out removes the index risk that comes with most HELOCs.
6. You bought the home recently. Fannie Mae's 6-month title rule and 12-month first-lien rule can rule out a conforming cash-out for now, so compare a second lien, subject to that lender's rules.
7. The property is an investment or a 2-4 unit home. Fannie Mae's cash-out caps drop to 75% or 70%, which may leave more room on a second lien, depending on the lender.
8. You plan to sell within a few years. Lower up-front costs matter more, and the CFPB notes that a HELOC is often required to be repaid when you sell.
9. You are using the money for a car or other personal expenses. Expect no mortgage interest deduction on any of the three.

How Aaron approaches this

Aaron Ehresmann is a Loan Originator at West Capital Lending in Irvine, CA (NMLS #2099240, company NMLS #1566096). He shops each scenario across 90+ lenders, so a HELOC, a home equity loan and a cash-out refinance can be compared on the same file instead of fitting you into one in-house product.

The HELOC programs he advertises start at a 640 credit score, and he holds a 4.98 average from 127 reviews across Experience.com, Google and Zillow. He is licensed in AR, AZ, CA, CO, CT, DC, FL, ID, KY, MD, ME, MN, OH, OR, PA, TN, VA, WA and WY. The next step is the HELOC page, where you can start your scenario.