HELOC, Home Equity Loan or Cash-Out Refinance?
Accessing $80,000 of equity while holding a 3.75% mortgage: the cash-out refinance costs $421 a month more than a second lien on the same money, purely for the privilege of destroying the old rate.
- Published
- Read
- 7 min
- $421
- Monthly cost of touching a 3.75% mortgage
- 85%
- Typical combined loan-to-value cap
- $169,960
- Interest on a HELOC paid interest-only
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A household with a home worth $520,000, a mortgage of $286,000 at 3.75%, and a need for $80,000. Three products are available and the difference between the best and worst choice is not the rate on the new money, it is what each one does to the mortgage they already have. The cash-out refinance costs $421 a month more on the existing balance alone, before the new $80,000 is considered at all.
That single fact governs the decision for anyone holding a mortgage below current market rates, which is a very large number of households. Here is the arithmetic, and the rule it produces.
The three products on the same $80,000
| Cash-out refinance | Home equity loan | HELOC | |
|---|---|---|---|
| Structure | Replaces the first mortgage | Second lien | Second lien, revolving |
| New balance | $366,000 | $286,000 plus $80,000 | $286,000 plus draws |
| Rate | 7.00% fixed | 8.75% fixed | 9.25% variable |
| Term | 30 years | 15 years | 10-year draw, 20-year repay |
| Payment on the new money | — | $799 | $617 interest-only |
| Total monthly payment | $2,435 | $2,281 | $2,099 |
| Increase over today's $1,482 | +$953 | +$799 | +$617 |
| Closing costs | $9,150 | $0–$1,500 | $0–$500 |
| Rate risk | None | None | Full |
Existing mortgage taken six years ago on a 30-year term, so 288 payments remain. The cash-out figure resets the clock to 360 payments as well as raising the rate, a cost the monthly comparison understates.
The HELOC looks cheapest on the monthly line and is the most expensive of the three if you use it the way its payment structure invites. That $617 pays no principal at all: after ten years of paying it, you still owe the full $80,000, and the payment then steps up to $733 for twenty more years.
| Phase | Payment | Months | Paid |
|---|---|---|---|
| Draw period, interest only | $617 | 120 | $74,040 |
| Repayment period | $733 | 240 | $175,920 |
| Total paid on $80,000 | 360 | $249,960 | |
| Interest | $169,960 |
Compare the home equity loan on the same $80,000: $63,820 of interest over fifteen years. The HELOC is not a worse product, it is the same product used without paying principal, which its minimum payment permits and its structure encourages.
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The rule: what is your current rate?
A cash-out refinance re-prices your entire mortgage, not just the new money, so the question is never "is 7.00% a good rate"it is "what does moving $286,000 from its current rate to 7.00% cost me".
| Current first mortgage rate | Extra monthly cost on the existing balance | Better option |
|---|---|---|
| 3.75% | +$421 | Second lien, clearly |
| 4.50% | +$294 | Second lien |
| 5.50% | +$107 | Second lien |
| 6.50% | +$31 | Roughly neutral. Compare closing costs |
| 7.25% | −$45 | Cash-out, probably |
| 8.50% | −$252 | Cash-out, clearly |
Cash-out refinances also carry a rate premium of roughly 0.25% to 0.50% over a rate-and-term refinance, and the loan-level pricing adjustment rises with the loan-to-value. The comparison above already includes that premium.
So the rule, stated plainly: if your first mortgage is more than about a point below current market, take a second lien. If it is at or above market, the cash-out refinance consolidates everything into one payment at one rate and is usually the better structure.
Which structure fits which purpose
| Need | Best fit | Why |
|---|---|---|
| Kitchen renovation, fixed quote | Home equity loan | Known sum, fixed payment, fixed end date |
| Renovation in phases over 18 months | HELOC | Interest only on what you have drawn |
| Tuition across four years | HELOC | Draw each semester rather than all at once |
| Standby emergency reserve | HELOC, with caution | Costs nothing undrawn, but can be frozen |
| Rate is already above market | Cash-out refinance | Improves the whole loan at once |
| Consolidating credit card debt | Reconsider entirely | Converts unsecured debt to secured |
That last row is the one worth stopping on, because the arithmetic is genuinely attractive and the risk is genuinely serious. Moving $40,000 of credit card debt at 24.99% to a home equity loan at 8.75% saves roughly $520 a month in interest. It also means that a job loss which would previously have damaged your credit file can now cost you the house.
Two things about HELOCs that surprise people
The line can be reduced or frozen
A HELOC is a commitment the lender can suspend. If property values in your area fall, if an updated valuation reduces your equity, or if your credit profile deteriorates, the lender can freeze further draws or reduce the limit, and this happened at scale during the last housing downturn, to borrowers who had never missed a payment. A HELOC held as an emergency fund is therefore a facility that may be withdrawn at exactly the moment a broad emergency arrives.
The draw period ends on a specific date
Payment shock at the end of the draw period is the most common HELOC problem, and it is entirely predictable. Find the date now. If you have been paying interest-only, work out the repayment-phase payment and decide today whether it fits, because the options at that point are refinancing into a home equity loan, extending with the lender if they will, or absorbing the increase.
| Approach | Monthly payment | Total interest on $80,000 |
|---|---|---|
| Interest-only through the draw period | $617 then $733 | $169,960 |
| $733 from month one | $733 | $105,400 |
| $1,010 from month one. A 10-year payoff | $1,010 | $41,200 |
| Home equity loan, 15-year fixed | $799 | $63,820 |
Same $80,000, same product, four outcomes spanning $128,760. The HELOC's flexibility is real in both directions, nothing stops you paying it down aggressively, and nothing makes you.
Costs, and the interest deduction
Second liens are cheap to originate. Many lenders charge no closing costs on a HELOC, and home equity loans commonly run $0 to $1,500. A cash-out refinance is a full mortgage origination, here $9,150, or 2.5% of the new loan.
| Cash-out refinance | Home equity loan | HELOC | |
|---|---|---|---|
| Appraisal | $650 | $0–$650 | $0–$650 |
| Origination and underwriting | $3,200 | $0–$500 | $0 |
| Title and settlement | $2,900 | $0–$400 | $0 |
| Transfer and recording | $2,400 | $185 | $185 |
| Annual fee | $0 | $0 | $0–$75 |
| Early closure fee | $0 | $0 | Often, within 3 years |
| Total to open | $9,150 | $185–$1,550 | $185–$910 |
HELOCs frequently waive costs on condition the line stays open for two or three years; close it early and the waived costs are recaptured. Ask for that clause specifically.
Before you sign
- Write down your current first mortgage rate and the number of payments remaining. This decides between a second lien and a cash-out.
- Calculate the CLTV cap: appraised value × the lender's percentage, minus your current balance.
- For a HELOC, ask for the draw period end date, the index and margin, the lifetime rate cap, and the repayment-phase payment on a full draw.
- For a home equity loan, confirm the rate is genuinely fixed for the whole term rather than fixed for an initial period.
- Ask about early closure fees and annual fees in writing.
- If this is debt consolidation, name what changed about the spending. If nothing has, stop here.
Frequently asked questions
- Can I have a HELOC and a home equity loan at the same time?
- Yes, subject to the combined loan-to-value cap across all liens. Lenders will look at total exposure rather than at each product separately, and the third lien is priced accordingly.
- Does a HELOC affect my credit score like a credit card?
- It is usually reported as revolving credit, so a large drawn balance against the limit can raise your utilisation and cost points. Some bureaus and models treat large HELOCs as instalment debt instead, which is why the effect varies between people.
- How long does each one take to close?
- A HELOC commonly funds in two to four weeks, a home equity loan in three to five, and a cash-out refinance in four to eight. All three include a three-business-day right of rescission on a primary residence, which cannot be waived without documented urgency.
- What if my home value has fallen since I bought?
- Then the CLTV calculation uses the new appraised value and the available amount shrinks or disappears. This is the structural weakness of equity borrowing: capacity contracts exactly when households most need it.
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