You've built up equity in your home, and now you need to access it. Maybe it's for a major renovation, consolidating high-interest debt, or covering emergency expenses. The question is: HELOC or cash-out refinance? With interest rates where they are, the answer isn't what it used to be.
A HELOC (Home Equity Line of Credit) works like a credit card secured by your home. You get a credit line you can draw from as needed, paying interest only on what you use. The catch? HELOC rates are variable and currently hovering around 8-9%. They can go higher if the Fed raises rates again.
Cash-out refinancing replaces your existing mortgage with a larger one, giving you the difference in cash. The advantage is locking in a fixed rate. The downside? If you refinanced at 3% a few years ago, replacing it with a 7% mortgage means paying significantly more interest on your entire loan balance, not just the cash you're taking out.
Here's the math that matters: If your current mortgage rate is below 5%, a HELOC usually makes more sense despite the higher rate - because you're not touching your low-rate primary mortgage. You're only paying the high rate on the amount you borrow. But if your mortgage is already at 6%+, a cash-out refinance might not hurt as much since you're not giving up a great rate.
| Your Situation | Better Option |
|---|---|
| Mortgage rate below 5% | HELOC (keep your low rate) |
| Mortgage rate 6%+ | Cash-out refi (minimal difference) |
| Need flexibility | HELOC (borrow as needed) |
| Want fixed payments | Cash-out refi (rate locked in) |
The worst mistake is not comparing actual offers. Lenders compete aggressively for HELOC and refinance business, and rates can vary by 1-2 percentage points between companies. That difference adds up to thousands over the life of the loan. Get quotes from at least three lenders before making a decision.