For many people, buying a house isn’t just about finding that perfect dream home — it’s also making a long-term financial investment. Every time you make a mortgage payment and chip away at your loan balance, you build equity in your home. You can then use that equity in a variety of ways to pay for whatever life throws your way: home renovations, medical bills, tuition — you name it.

The question is, how to get equity out of your home? Two of the most common approaches are cash-out refinances and home equity lines of credit (HELOC). Both offer their own advantages, but there are also significant differences — not to mention drawbacks — to consider. We’ve put together this guide to help you compare cash-out refinance vs. HELOC mortgages and decide which option best fits your needs.

Cash-out refi vs. home equity line of credit: An overview

Cash-out refis and HELOCs both tap into your home equity, but that’s where the similarities largely end. These loan options function on different levels, potentially impacting everything from the status of your mortgage to your repayment schedule.

HELOC VS. CASH-OUT REFI

The most obvious and important distinction is this: A cash-out refi replaces your existing mortgage while a HELOC adds a second mortgage to your current home loan.

Another key difference between the two is that a cash-out refi gives you a lump sum payment while a HELOC functions as an open line of credit to draw from. One option drops all of the money up front while the other lets you take out funds at your own discretion.

How does a cash-out refinance work?

When you use a cash-out refi, you’re replacing your original mortgage with a new, larger home loan. That may sound like a raw deal, but the new loan pays off the balance on your mortgage.

The amount left over is paid out to you as a lump sum, and you’re free to use that money any way you like. However, using funds from a Cash-out Refinance to consolidate debt may result in the debt taking longer to pay off as it will be combined with borrower’s mortgage principal amount and will be paid off over the full loan term. 

How does a HELOC work?

A HELOC mortgage is a line of credit.*

Rather than receive a lump sum payment, you can withdraw funds as needed to cover any expenses you like. In that regard, it’s somewhat similar to your basic credit card, except the amount of credit you have access to is based on how much equity you have in your home. And like a credit card, repaying your balance will replenish the amount of money available for withdrawal.

Whereas a cash-out refi swaps out your original mortgage for a new one, a HELOC loan acts as a second mortgage. You’ll need to cover monthly mortgage payments on both your existing home loan and your HELOC.

Cash-out refinance vs. HELOC: A closer comparison

Beyond the broad distinctions listed above, cash-out refis and HELOCs diverge in some very key ways — ways that may impact how much you owe on your loan. Let’s take a closer look at how these two loan options stack up:

	Cash-out refi	Traditional HELOC
Borrowing limits	Amount based on your home equity, often up to 80% of total equity	Amount based on your home equity, may be as high as 90% of total equity
Interest rates	Cash-out refi rates may be lower than HELOCs, depending on your eligibility qualifications	HELOCs almost always use variable interest rates, so they may change over the life of the loan
How you can use funds	Any purpose	Any purpose
Loan qualifications	Lenders may have more flexible eligibility standards since you’re trading one loan for another	Eligibility standards may be more restrictive due to the additional debt of the second mortgage
Length of home loan	May extend the length of your mortgage after refinancing	Has no effect on your original home loan since HELOCs are second mortgages
Number of mortgage payments each month	One	Two (original mortgage + HELOC)
Closing costs	Pay closing costs just like any other new mortgage	Closing costs are minimal

HELOC vs. cash-out refi: Pros and cons

No loan option is perfect by any means; there will always be pros and cons to weigh when considering any type of financing. When it comes to choosing between a cash-out refinance or HELOC, these are the most pressing factors to consider:

HELOC Pros

• Line of credit allows you to only use funds when needed
• Replenish available funds with each payment
• Interest rates are often lower than other credit options
• Credit limits are typically higher than traditional credit card accounts
• Use HELOC funds on any expense
• Flexible closing cost options

HELOC Cons

• Adds extra debt on top of existing mortgage
• Borrowers owe two monthly mortgage payments (assuming original home loan is still active)
• May be more difficult to qualify for favorable loan terms
• HELOCs with variable interest rates can make monthly expenses less predictable
• Requires financial discipline to avoid overspending

Cash-out refi Pros

• Lump-sum payment can make it easier to cover large expenses or consolidate debt
• Trade your existing mortgage for a new home loan (in other words, no second mortgage)
• Interest rates are often lower than HELOC options
• Lenders may offer more lenient application qualifications compared with a HELOC

Cash-out refi Cons

• Refinancing your mortgage could extend your amortization schedule
• Depending on current mortgage rates, the interest rate on your refinanced loan could be higher than your existing mortgage
• Using too much equity could add private mortgage insurance (PMI) to your new home loan
• Closing costs are required on any refinance

When should I use a cash-out refi?

So, having said all of that, when does it make sense to use a cash-out refi instead of a HELOC mortgage? There are two major considerations to take into account: what you’re using the money for and what the impact will be on your existing mortgage.

I want a one-time payout

The lump sum payment that a cash-out refi provides can be great for consolidating debt or covering large expenses all at once. If your goal is to get your financial house in order and possibly improve your credit score, a cash-out refi may be able to help.

At the same time, if you’re facing a large or unexpected expense — think: major car repairs, hospital bills or catastrophic home repairs — a cash-out refi may make the most sense in that situation too. In some cases, homeowners may use the bulk of the payment on whatever immediate expenses need to be paid and then squirrel away the rest for a rainy day. Generally speaking, though, cash-out refis are best used to cover one-time fixed costs.

I want to refinance my mortgage

A cash-out refi can kill two birds with one stone by giving you access to money in a time of need while also improving your loan terms — if you time it right, that is. If current interest rates are lower than your original mortgage rate, then it could be advantageous to refinance. But if the opposite is true, you should take a hard look at your complete financial picture before agreeing to a cash-out refi.

When should I use a HELOC?

Choosing a HELOC over a cash-out refi largely comes down to the nature of your planned expenses. Are they one-time fixed costs or recurring obligations? Do you know how much money you will need to fully cover those costs? If the following scenarios sound familiar, then a HELOC could be the right fit:

I’m not sure exactly how much money I need

Do you know you’ll need financial assistance to pay for an upcoming expense, but you don’t know what the final cost will be? HELOC loans can be great ways to finance projects like ongoing home renovations with no set budget or end date. You’re able to simply draw upon funds as needed to pay expenses as they come up.

I want to cover ongoing expenses

Although you could certainly use your entire line of credit in one go, HELOCs are ideally constructed for recurring costs. College tuition is a good example. You can just leave your line of credit untouched until a new semester rolls around. And if there’s a tuition increase, you could simply withdraw more money to cover the rate hike.

I can manage a second mortgage

You need to carefully consider the implications of taking on a second mortgage. Budgeting for two monthly installments can be very tricky, especially with a traditional HELOC’s variable interest rate. Your housing costs could change throughout the length of your home loan, so you’ll want to be prepared for any rate increases that may come along.

If, however, you’re happy with the current loan terms on your mortgage and you’re comfortable taking on another loan, a HELOC could make a lot of sense. It’s all about matching the right loan option with the right circumstances.

Should I choose a cash out refi or HELOC?

Cash-out refinance and HELOC loans serve very similar roles: turning home equity into money in your pocket. However, how they function is very different. When weighing a cash-out refinance vs. a HELOC, you need to account for the financial implications of each option.