What is a cash-out refinance?
A cash-out refinance lets you replace your current mortgage with a new, larger loan, and you pocket the difference in cash. You’ll begin repaying the new loan right away, typically at a fixed interest rate.
This option can be a smart move if you need a lump sum for a major expense and want a lower interest rate than a credit card or personal loan. Homeowners often use a cash-out refi for things like:
- Home renovations
- Debt consolidation
- Funding a second property or business investment
It may also be a good option if you want to switch from an adjustable-rate mortgage (ARM) to a fixed-rate loan for more predictable payments.
Just a heads-up: cash-out refinances come with closing costs, and the math might not work in your favor if you already have a low mortgage rate.
Thinking about it? Be sure to run the numbers first. Use our cash-out refinance calculator to see if it makes sense for you.
What is a HELOC?
A HELOC is a flexible, revolving line of credit secured by your home. You’re approved for a set credit limit and can borrow from it as needed during the draw period (typically 10 years). You’ll only pay interest on the amount you use.
A HELOC can be a good option if you:
- Want access to funds over time
- Prefer to keep your existing mortgage in place
- Are comfortable with a variable interest rate
HELOCs are especially useful for ongoing or phased home improvements, or emergency expenses and unexpected costs. You can learn more about how a home equity line of credit works in our comprehensive HELOC guide.
Refinancing to Fund Home Renovations
Both HELOCs and cash-out refis can help you fund home upgrades, but they work in different ways. If you’re tackling a major renovation with a clear budget, a cash-out refi might make more sense. You’ll get a lump sum up front and predictable monthly payments. Planning a phased project or want more flexibility? A HELOC lets you borrow as needed and only pay interest on the amount you’ve borrowed during the draw period.
Key differences between a cash-out refinance vs. HELOC
Here's a quick guide to help you compare.
| Feature | Cash-Out Refi | HELOC |
|---|---|---|
| Replaces Mortgage | Yes | No (it’s a second loan) |
| Funds Disbursed | Lump sum | As needed |
| Interest Rate | Typically fixed | Typically variable |
| Monthly Payments | Full mortgage payment | Interest only during draw |
| Upfront Costs | Higher (closing costs) | Lower |
| Best For | One-time large expenses | Ongoing, flexible access to funds |
Is it better to refinance or get a HELOC?
The choice between a cash-out refinance and a HELOC depends on how much you need, when and how you want to repay it. A cash-out refinance gives you a lump sum up front, and usually, a fixed interest rate. In contrast, a HELOC works like a revolving credit line: you borrow only what you need, when you need it, and repay as you go—typically with a variable rate.
PRO TIP
Don’t confuse a HELOC with a home equity loan. While both use your home as collateral, a home equity loan provides a lump sum typically with a fixed interest rate. A HELOC, by contrast, is a revolving credit line you can tap into as needed, usually with a variable rate and interest-only payments during the draw period.
Many homeowners compare HELOC vs. refi, or HELOC vs. cash-out refi, to find the best terms. Others weigh traditional refinance or HELOC against alternatives like home equity loans to determine which fits their goals best. This article covers various refinancing options in more depth.
Cash-Out Refinance vs. HELOC
| CASH-OUT REFI | HELOC |
|---|---|
| Want a lump-sum up front | Want to borrow gradually |
| Prefer a fixed rate with predictable monthly payments | Prefer to keep your current mortgage |
| Don’t mind replacing your current mortgage | Are OK with a variable rate |
| Have a major one-time expense | Need flexibility for ongoing or unpredictable expenses |
Your long-term plans can also help guide the decision. If you expect to stay in your home for years to come—or you think interest rates may go up—a cash-out refi might lock in a better deal. If flexibility is more important, a HELOC may be the smarter path.
