You’re staring at your home equity like it’s a savings account you’ve been afraid to touch. Maybe you need $50,000 for a kitchen renovation, or you’re consolidating high-interest debt, or your kid’s college tuition is due. Either way, you’ve landed on the same fork in the road that trips up most homeowners: cash-out refinance or HELOC?
The internet will give you the standard breakdown—fixed rate versus variable, one loan versus two, closing costs here versus there. But that comparison misses the actual question you’re asking, which is: which one costs me less over the life of this decision?
The answer depends on variables most people never calculate.
The Misleading Simplicity of Rate Comparisons
Here’s how most people approach this decision: they look at the interest rate on a cash-out refinance, compare it to the rate on a HELOC, and pick whichever number is lower.
This is like choosing a car based solely on the sticker price while ignoring that one gets 15 miles per gallon and the other gets 35.
A cash-out refinance replaces your entire mortgage with a new, larger one. You’re borrowing against your equity, yes, but you’re also resetting your entire loan. If you have 22 years left on your current mortgage at 3.5% and you refinance into a new 30-year loan at 7% to pull out $60,000, you haven’t just borrowed $60,000 at 7%. You’ve refinanced your remaining balance—let’s say $280,000—at that higher rate too.
That’s the part people miss. The “cost” of your cash-out isn’t just the interest on the cash you’re extracting. It’s the interest differential on your entire mortgage balance.
A HELOC, by contrast, sits on top of your existing mortgage. Your original loan stays untouched. You’re only paying interest on what you actually draw, at whatever rate your HELOC carries.
So which costs less? It depends entirely on what rate you’re walking away from.
When Cash-Out Refinancing Is Actually Cheaper
If you locked in your mortgage before 2022 at 3% or 4%, a cash-out refinance in the current rate environment almost never makes sense. You’d be sacrificing a rate that may never exist again for the next generation of homeowners.
But not everyone has a rate worth protecting.
If you bought in 2023 at 7.2% and rates have dropped to 6.5%, a cash-out refinance suddenly changes character. You’re not sacrificing a good rate—you’re improving one while accessing equity. In this scenario, the cash-out might cost you less than keeping your current mortgage and adding a HELOC on top.
Here’s a rough framework: if your current mortgage rate is within 0.5% of prevailing refinance rates (or higher), cash-out refinancing deserves serious consideration. If your current rate is more than 1% below market rates, you’re almost certainly better off with a HELOC or home equity loan, even if the HELOC rate looks higher on paper.
The math isn’t intuitive. A HELOC at 8.5% can cost less than a cash-out refinance at 7% if that refinance means surrendering a 3.5% mortgage. Your existing loan’s rate is part of the equation.
The Hidden Cost of Resetting Your Amortization
Here’s what the rate comparison completely ignores: amortization reset.
When you refinance, you typically restart your loan term. If you’ve been paying your mortgage for eight years, you’ve made real progress on principal. A 30-year loan after eight years of payments isn’t just 22 years shorter—it’s also weighted more heavily toward principal reduction. In year eight, more of each payment chips away at what you actually owe.
Refinance into a new 30-year loan and you restart that clock. Your payments shift back toward interest. Even if your new rate is slightly better, you might pay more total interest over the life of the loan simply because you extended your timeline.
This is why refinancing to lower your payment can actually cost more—the monthly savings often mask a much larger long-term expense.
A HELOC doesn’t touch your amortization. Your original mortgage keeps marching toward payoff while the HELOC handles your new borrowing separately.
The HELOC’s Variable Rate Problem
HELOCs aren’t innocent, though. Their biggest liability is the variable rate, which means your payment can climb without warning.
Most HELOCs are tied to the prime rate, which moves with the Federal Reserve’s decisions. When rates rise, your HELOC payment rises with them—sometimes dramatically. A $50,000 HELOC at 8% costs about $333 per month in interest. If rates climb and your HELOC adjusts to 11%, that jumps to $458. That’s an extra $1,500 per year you didn’t budget for.
The cash-out refinance locks your rate. Whatever you agree to at closing is what you pay for 15 or 30 years. There’s psychological value in that predictability, and for some borrowers, it’s worth paying a premium.
But here’s the counterpoint: HELOCs also adjust downward. If rates fall, your HELOC payment drops automatically. You don’t have to refinance again to capture the savings. The same volatility that creates risk also creates opportunity.
If you’re borrowing for a short-term need—say, a renovation you’ll complete and pay off within five years—the HELOC’s flexibility often wins. You’re exposed to rate volatility for a limited window, and you can pay down the balance aggressively without refinancing your entire mortgage structure.
If you’re consolidating debt you’ll carry for a decade or more, the fixed-rate certainty of a cash-out refinance might justify its other costs.
Closing Costs: The Expense Everyone Underestimates
Cash-out refinances carry full mortgage closing costs. According to Freddie Mac, borrowers should expect to pay 2% to 5% of the total loan amount in closing costs—not just the cash you’re extracting, but the entire refinanced balance.
On a $340,000 refinance, that’s $6,800 to $17,000 in closing costs. Some lenders will roll these into your loan, which feels painless until you realize you’re now paying interest on your closing costs for 30 years.
HELOCs typically have much lower upfront costs. The Consumer Financial Protection Bureau notes that many HELOCs come with minimal fees—often $0 to $500 for basic products—though some charge appraisal fees or annual maintenance fees. The gap in closing costs alone can take years to recover through rate savings.
This is why understanding refinance break-even points matters—if you’re not staying in the home long enough to recoup closing costs, you’ve lost money regardless of the rate.
The Flexibility Factor
Beyond pure cost, consider how each option affects your future decisions.
A cash-out refinance is a one-time transaction. You borrow what you borrow, and that’s it. Need more money in three years? You’ll have to refinance again, paying another round of closing costs.
A HELOC functions like a credit line. You can draw funds, pay them back, and draw again during the draw period (typically 10 years). This flexibility is valuable if your cash needs are unpredictable—ongoing renovations, irregular business expenses, or education costs spread over multiple years.
But flexibility has a shadow side. The same credit-line structure that makes HELOCs convenient also makes them easy to abuse. Treating your home equity like a checking account is how people end up underwater when property values dip. The discipline required to use a HELOC responsibly is higher than most borrowers expect.
The Scenario Where HELOC Wins Clearly
You have a 3.2% mortgage with 20 years remaining. You need $40,000 for a home renovation. Current cash-out refinance rates are around 7%.
With a cash-out refinance, you’d surrender your 3.2% rate on your entire remaining balance—let’s say $250,000—and refinance everything at 7%. Even ignoring the amortization reset, you’re now paying 3.8% more on $250,000 annually. That’s $9,500 per year in additional interest on money you weren’t even borrowing, just to access $40,000.
A HELOC at 8.5% on $40,000 costs you about $3,400 per year in interest. Yes, the HELOC rate is higher. But you’re only paying it on the $40,000 you actually need, not on your entire mortgage.
The HELOC saves you over $6,000 per year compared to the refinance in this scenario. Over five years, that’s $30,000—nearly the amount you borrowed.
The Scenario Where Cash-Out Wins Clearly
You bought your home 18 months ago at 7.5%. Rates have dropped to 6.25%. You need $60,000 to consolidate credit card debt at 22% APR.
Here, the cash-out refinance actually improves your mortgage situation while giving you access to equity. You’re not sacrificing a good rate—you’re escaping a bad one. The consolidation saves you the brutal interest on high-rate debt, and your overall mortgage cost decreases.
A HELOC in this scenario would saddle you with two loans: your existing 7.5% mortgage plus a new HELOC at probably 8.5% or higher. You’d be paying more across both products than you would with a single refinanced loan at 6.25%.
What About Home Equity Loans?
Home equity loans are the middle ground nobody talks about. Like a HELOC, they sit on top of your existing mortgage without disturbing it. But like a cash-out refinance, they offer fixed rates.
If you want rate certainty without sacrificing your existing mortgage rate, a home equity loan might be the answer. You’ll typically pay higher closing costs than a HELOC but lower than a full refinance. And the fixed rate protects you from volatility while keeping your original mortgage intact.
This option makes particular sense if you’re borrowing for a defined project with a known cost—you don’t need the HELOC’s flexible draw structure, and you don’t want variable-rate exposure.
For a deeper comparison, see the real cost of choosing a HELOC over a home equity loan.
The Decision Framework
Before choosing, answer these questions honestly:
What’s your current mortgage rate? If it’s below 5%, protect it fiercely. A HELOC or home equity loan almost certainly costs less than surrendering that rate.
How much are you borrowing relative to your remaining balance? If you’re pulling out $30,000 against a $300,000 mortgage, you’re refinancing ten times more than you need. The HELOC targets only what you’re actually borrowing.
How long will you carry this debt? Short-term borrowing favors HELOCs—you’re exposed to rate volatility briefly and can pay it off without restructuring your mortgage. Long-term borrowing might favor fixed rates, depending on your existing mortgage terms.
What are you using the money for? Renovations that increase home value have different calculus than debt consolidation or consumption. If you’re doing a cash-out refinance for renovations, run the numbers on whether the improvement actually returns enough value to justify the borrowing cost.
How disciplined are you? A HELOC’s open credit line tempts even responsible borrowers. If you’ll treat it like free money, the structured payoff of a cash-out refinance might save you from yourself.
The Real Answer
There is no universally cheaper option. The cash-out refinance versus HELOC debate can’t be resolved by comparing rates alone. You have to calculate the total cost of each path given your specific existing mortgage, borrowing needs, and time horizon.
For most homeowners who locked in rates before 2022, the HELOC wins on pure cost—often by a significant margin. The rate looks higher, but you’re not paying it on money you already borrowed at rock-bottom rates.
For homeowners with recent high-rate mortgages, a cash-out refinance during a rate dip can improve your entire financial picture while accessing equity.
And for anyone in between, the home equity loan offers a compromise worth running numbers on.
The mistake is treating this as a simple rate comparison. It’s not. It’s a calculation involving your existing rate, your borrowing amount, your timeline, closing costs, and your tolerance for payment variability.
Get those inputs right, and the answer usually becomes obvious. Skip them, and you’ll pick the option that looks cheapest while costing you the most.
What happens if you need to access equity again in five years—are you prepared to navigate this decision twice?