HELOC vs. cash-out refinance: Which is best for you?

A cash-out refinance and a home equity line of credit (HELOC) are two ways that homeowners can borrow against the equity they’ve built. A cash-out refinance allows you to replace your current mortgage with a larger one and withdraw the difference as a lump sum. A HELOC is a second mortgage that allows you to borrow your equity as needed.

If you need to borrow money for major expenses like home renovations, college expenses, or debt consolidation, knowing the difference between a cash-out refinance and a HELOC can help you choose the right solution for you.

Key takeaways:

• A cash-out refinance replaces your current mortgage with a larger loan and new terms, whereas a HELOC serves as a second mortgage that leaves your existing first mortgage as is.
• Cash-out refinances provide a single upfront lump-sum payout, while HELOCs offer a revolving credit line that you can draw upon as needed over a set period of time.
• Cash-out refinances typically carry fixed interest rates and predictable monthly payments, whereas HELOCs feature variable interest rates that fluctuate with market conditions.

What is a cash-out refinance?

A cash-out refinance¹ replaces your current home loan with a larger mortgage. Once you pay off your original loan, you keep the difference to use as you like and repay it as part of your new mortgage. Unlike a second mortgage, which adds a separate loan and monthly payment, a cash-out refinance consolidates everything into a single mortgage.

Through this process, you’re borrowing your home equity by refinancing to a higher loan amount. This may increase your monthly payment, cost you more in interest, and extend your loan term.

Cash-out refinance requirements

Getting a cash-out refinance is a lot like getting a mortgage to buy a home. You'll need to apply with a lender and document your income, credit history, and your home’s value. To qualify for a cash-out refinance, borrowers typically must meet the following requirements:

• Existing home equity: Most lenders require that you maintain at least 20% equity in your home after the refinance. This means you must have enough equity in your home to borrow.
• Credit score: Prior to November 2025, Fannie Mae and Freddie Mac required a minimum credit score of 620 for conventional loans. Currently, loan approval is based on an evaluation of overall credit risk factors, though lenders can set their own credit score requirements.
• Debt-to-income ratio: For conventional cash-out loans, a DTI ratio below 50% is usually required. Federal Housing Administration and Veterans Affairs loan guidelines may allow higher DTI ratios, depending on your credit or cash reserves.

How a cash-out refinance works

A cash-out refinance replaces your existing mortgage with a new, larger loan. You use the proceeds of the new loan to pay off the old loan and keep the difference in cash. This lets homeowners tap into the equity they've built up in their property without taking out a second mortgage.

Here’s a simple breakdown of how it works:

1. Determine your home’s current value. Suppose your home is currently worth $400,000.
2. Check your existing mortgage balance. You still owe $250,000 on your mortgage, giving you $150,000 in equity.
3. Choose new loan amount: Most lenders let you borrow up to 80% of your home’s value, which means you can refinance with a loan for $320,000.
4. Receive the cash difference: After paying off the existing $250,000 mortgage, you receive the remaining $70,000 as cash, though you’ll have to pay closing costs as well.

This new loan replaces your original mortgage and comes with updated terms, such as a new interest rate, monthly payment, and a reset loan term. Your new monthly payment may be higher depending on the amount borrowed and the loan terms.

Cash-out refinancing is often used to borrow cash for major expenses like home improvements, consolidating debt, or education costs.

Cash-out refinance pros and cons

A cash-out refinance comes with potential benefits as well as tradeoffs. Some of the advantages of these financing options include:

• Single monthly payment: Simplifies budgeting by keeping all home financing combined under one primary mortgage.
• Predictable fixed rates: Locks in consistent monthly payments for the entire 15- or 30-year loan term.
• Large lump sum: Delivers substantial capital upfront for large single expenses.

However, a cash-out refinance also comes with potential downsides, such as:

• Resets original mortgage: Replaces your existing mortgage, which can raise your monthly payment if your original interest rate is significantly lower than current market rates.
• High upfront closing costs: Refinancing requires closing fees ranging between 3% - 6% of the new total loan amount.
• Extends loan timeline: Resets the clock on your mortgage payoff schedule.

What is a HELOC?

A HELOC is a second mortgage that allows homeowners to borrow money against the equity they’ve built in their home. It works like a credit card, with your equity establishing the spending limit. You can borrow money as needed at a much lower interest rate than an unsecured credit card, and you only have to pay interest on what you spend.

While Rocket Mortgage doesn’t currently offer HELOCs, it’s good to understand all your home loan options so you can choose the path that’s right for you.

HELOC requirements

While exact eligibility criteria vary depending on the lender, you’ll typically need to meet the following requirements to get a HELOC.

• Existing home equity: As with a cash-out refinance, you need to have at least 20% equity in your home to borrow with a HELOC.
• Credit score: The requirement for many lenders is 680, although some may require a minimum of 720.
• DTI ratio: HELOC lenders look for a 43% or lower DTI ratio.

How a HELOC works

A HELOC is a second mortgage, so you’ll need to make payments on it in addition to your primary monthly mortgage payment.

A HELOC has two phases:

• Draw period: This initial phase often lasts 5 to 10 years. This is when you can borrow from your available credit as needed. You’re usually only required to make interest-only or minimum payments.
• Repayment period: Once the draw period ends, you begin making full monthly payments that include both principal and interest until the balance is paid off. This typically takes 10 – 20 years.

This offers flexibility up front, but it’s important to plan for the higher payments that come in the repayment period.

HELOC pros and cons

Like most financing options, HELOCs also come with different benefits and drawbacks. Some of the advantages of a HELOC include:

• Primary mortgage rate remains the same: Leaves your existing low-rate primary mortgage intact.
• Flexible borrowing: Draw only what you need, when you need it, avoiding interest charges on unused equity.
• Lower initial closing costs: Upfront costs are generally lower than a cash-out refinance, with many lenders waiving closing fees.

However, it’s also important to be aware of the potential downsides of HELOCs compared to home equity loans or other options, including:

• Variable interest rates: Interest rates fluctuate with market benchmarks, making future monthly payments unpredictable.
• Payment shock: Monthly payments can rise sharply when the draw period ends and principal repayment begins.
• Second monthly payment: Adds an additional monthly debt obligation alongside your primary mortgage.

HELOC vs. cash-out refinance: A comparison

Although both options allow you to borrow equity in your home, there are important differences to consider when choosing between them.

Key differences between a HELOC and a cash-out refinance

If you’re trying to decide between a HELOC and a cash-out refinance, here’s how they’re similar and how they’re different.

Where they overlap:

• Both use equity as collateral to borrow.
• Both can be used for whatever purpose you choose.
• Better interest rates than personal loans or credit cards
• Your home is on the line if you can’t keep up with payments

Where they differ:

• A cash-out refinance replaces your primary mortgage can come with better interest rates and less in-depth requirements for approval.
• HELOCs typically take the form of a second mortgage and are considered riskier for lenders. They have variable interest rates, which means you may pay more over the lifetime of the loan.
• The extended draw period of a HELOC may work better for borrowers looking to access their funds as needed over a longer period.
• HELOCs can be drawn upon over a period of time and don’t need to be repaid until the draw period ends.
• Repayment of a cash-out refinance gets rolled into your primary mortgage payment, which may be higher.

HELOC: 5 things to consider

Comparing the pros and cons of a cash-out refinance versus a HELOC can help homeowners make the best choice for their financial situation. As you evaluate your options, it’s important to consider several key factors that can impact both the short- and long-term outcomes.

1.  Think about loan terms

A cash-out refinance means getting a new mortgage with new loan terms. You should make sure those terms, such as the length of your mortgage and the rate you’ll be paying, will work for you.

HELOCs, on the other hand, have their own loan terms, separate from your existing mortgage. They typically come with a draw period of 10 – 15 years and a repayment period of 10 – 20 years. The repayment period can be expensive for some homeowners, depending on interest rates and how much they paid off during the draw period.

2.  Consider payment options

You should also consider how you’ll receive your funds. If you’re in need of a one-time, lump sum of money for a renovation or personal expense, a cash-out refinance will be simpler. If you’d rather access the money as needed over time, you’ll be better off with a HELOC.

3.  Compare rates

Rates are always a key factor when comparing loan options. For homeowners who prefer fixed rates, a cash-out refinance will be more comfortable, as their payments won’t change over time. But if you’re comfortable with an adjustable rate, HELOCs may offer you access to more equity overall. Just remember, HELOC interest rates are generally a little higher.

4.  Estimate closing costs

If you want to pay less up front, HELOCs may be a better option. This is because refinancing incurs closing costs, while HELOCs typically do not. Those upfront costs for a cash-out refinance can range from 3% – 6% of the loan amount, which can significantly affect your available cash and overall affordability.

5.  Don’t forget taxes

There are also tax implications of refinancing versus taking out a line of credit. The IRS views refinances as a type of debt restructuring. This means there are significantly fewer deductions and credits you can claim compared to when you got your first mortgage.

When to choose a cash-out refinance vs. a HELOC

Here’s when a cash-out refinance might make sense:

• Current interest rates match or beat your existing rate: You can secure cash while simultaneously lowering the interest rate on your main mortgage.
• You need a single lump sum: You are making a major one-time payment, such as consolidating $50,000 in credit card debt.
• You prefer payment certainty: You want fixed, predictable monthly payments for the entire term of the loan.

Now let’s look at some situations where a HELOC might be the right choice:

• Your current mortgage rate is very low: You want to tap equity without surrendering a low primary mortgage rate.
• You have ongoing expenses: You are funding recurring costs like contractor draws or college tuition installments over several years.
• You want an emergency safety net: You want access to a standing credit line without paying interest until you actually draw funds.

HELOC vs. cash-out refinance FAQs

Here are the answers to some frequently asked questions about HELOCs and cash-out refinances.

What is the cheapest way to get equity out of your house?

The cheapest option depends on your current primary mortgage interest rate and how much you plan to borrow. If market interest rates are low, a cash-out refinance can be cost-effective. However, if you have a low primary mortgage rate, a HELOC can be cheaper because it avoids resetting your primary mortgage rate and incurs lower upfront closing costs

How does a cash-out refinance compare with a HELOC and a home equity loan?

A cash-out refinance replaces your primary mortgage with a single larger loan. A HELOC is a variable-rate second mortgage offering a revolving line of credit. A Home Equity Loan³ is a fixed-rate second mortgage that provides a one-time lump sum without altering your original primary mortgage.

What are some tools to compare HELOCs and cash-out refinances?

You can use the Rocket Mortgage home equity calculator to help you estimate how much equity you have in your home. The Rocket Mortgage refinance calculator can help you find out if refinancing would benefit you.

The bottom line: Make your home’s equity work for you

Because borrowing against your home carries financial risk, taking out any type of home loan is a major decision. If you’re still unsure whether a cash-out refinance or a HELOC is the better fit for your situation, consider speaking with your lender. They can walk you through the pros and cons of each option and help you make an informed choice based on your goals and financial profile.

Already know that a cash-out refinance is the right path for you and your home equity? Apply for a cash-out refinance today!

¹Refinancing may increase finance charges over the life of the loan.

²Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

³Home Equity Loan Product is a second standalone lien and may not be used for piggyback transactions. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Michigan is $10,000.00). Not available on Ameriprise products. Additional restrictions, terms, and conditions apply. This is not a commitment to lend.