HELOC vs. Cash-Out Refinance: Which Costs Less?
If you locked a low rate between 2020 and 2022, a cash-out refinance reprices your entire mortgage just to reach your equity. A HELOC only prices the new money. Here's how the two compare and when each one wins.
At a glance
- HELOC: keeps your first mortgage, prices only the new money, usually closes faster.
- Cash-out refinance: replaces your first mortgage, one payment, can raise more cash.
- If your current rate is well below today's rates, a HELOC usually costs less.
Side by side
| HELOC | Cash-out refinance | |
|---|---|---|
| Your first mortgage | Stays as is | Paid off and replaced |
| Rate applies to | Only the new money | Your whole balance |
| Closing costs | Vary by program; tied to the second-lien loan | Typically 2% to 5% of the full new loan |
| Time to close | Some eligible files fund in about a week; banks take longer | Often 30 to 45 days |
| Payments | Two: first mortgage + HELOC | One |
| Loan term | Separate term you choose | Usually restarts at 30 years |
| Common max CLTV | 80% to 90% | 80% on most conventional loans |
A worked example
Say your home is worth $800,000. You owe $400,000 at 3.0% with 25 years left, and you need $100,000. The rates below are hypothetical, not a quote. To compare fairly, both paths are measured over the same 10 years.
| Keep first + HELOC | Cash-out refinance | |
|---|---|---|
| Loans | $400,000 at 3.0% (25 years left) + $100,000 at 8.75% for 15 years | $500,000 at 6.5% for 30 years |
| Monthly payment | $1,897 + $999 = $2,896 | $3,160 |
| Paid over 10 years | $347,555 | $379,241 |
| Interest over 10 years | $170,658 | $303,121 |
| Still owed after 10 years | $323,103 | $423,881 |
After 10 years, keeping the first mortgage has cost $31,686 less in payments and leaves you owing $100,778 less. The HELOC carries the higher rate, but only on $100,000. The refinance moves $400,000 from 3.0% to 6.5%.
Compare real offers the same way: use the same holding period, include closing costs, and look at what you'd still owe when you expect to sell or refinance.
When a cash-out refinance wins
- Your current rate is already close to today's rates.
- You need more cash than a HELOC limit allows.
- Your first mortgage is an adjustable rate that's about to reset.
- You want to drop FHA mortgage insurance or remove a co-borrower from the loan.
- You strongly prefer a single payment.
When a HELOC wins
- Your first mortgage rate is well below current rates.
- You need a modest amount compared with your balance.
- You need the money quickly. See how long a HELOC takes.
- You want to keep closing costs down.
Run your own numbers in the HELOC calculator, then compare the payment with what a refinance quote shows.
Frequently asked questions
Is a HELOC better than a cash-out refinance?
It depends on your current rate. If your first mortgage rate is well below today's rates, a HELOC usually costs less because it only prices the new money. If your rate is already near market, or you need more cash than a HELOC allows, a cash-out refinance can make more sense.
Does a HELOC affect my first mortgage?
No. A HELOC is a separate loan in second position. Your first mortgage rate, payment and payoff date don't change.
Which is faster, a HELOC or a cash-out refinance?
Usually the HELOC. Some online HELOC programs fund eligible files in about a week, while cash-out refinances commonly take 30 to 45 days.
Which has lower closing costs?
Often the HELOC in total dollars, because a cash-out refinance's costs, typically 2% to 5%, apply to the full new loan. HELOC costs vary by program, so compare the APR and fees on any offer.
Can I refinance later if rates drop?
Yes. If rates fall, you can refinance your first mortgage and roll in the HELOC balance, or refinance the HELOC on its own.