When you need access to the equity in your home, you have two main options: a Home Equity Line of Credit (HELOC) or a Cash-Out Refinance. Each has distinct advantages, and the right choice depends on your situation.
What's the Difference?
HELOC
A revolving line of credit secured by your home
- Borrow as needed, up to a limit
- Only pay interest on what you use
- Variable interest rate
- Keeps your first mortgage intact
- Draw period (usually 10 years) then repayment period
Cash-Out Refinance
Replace your mortgage with a larger loan
- Get a lump sum at closing
- Fixed monthly payment
- Usually fixed interest rate
- Resets your mortgage term
- Higher closing costs
When to Choose a HELOC
A HELOC makes sense when:
- You have a great rate on your current mortgage — Why replace a 3% mortgage with a higher rate?
- You need flexible access to funds — Ongoing renovations, education expenses, or uncertain costs
- You only need part of your equity — Don't want to borrow more than necessary
- You want lower upfront costs — HELOCs typically have much lower closing costs
- You plan to pay it off quickly — Variable rates are less risky for short-term borrowing
When to Choose a Cash-Out Refinance
Cash-out refinance makes sense when:
- You can get a lower rate than your current mortgage — Reduce payments AND get cash
- You want predictable payments — Fixed rate = no surprises
- You need a large lump sum — Major renovation, debt consolidation, or investment
- You prefer simplicity — One mortgage payment, not two
- You're okay extending your loan term — Restarting a 30-year mortgage
Side-by-Side Comparison
Real-World Examples
Example 1: Kitchen Renovation
Situation: Sarah has a 3.5% mortgage and wants to renovate her kitchen. She estimates $40,000 but isn't sure of the final cost.
Best choice: HELOC
Why: She can draw funds as the project progresses, only pay interest on what she uses, and keep her excellent mortgage rate.
Example 2: Debt Consolidation
Situation: Mike has $50,000 in credit card debt at 22% APR and a 6.5% mortgage. Current rates are 6%.
Best choice: Cash-Out Refinance
Why: He can lower his mortgage rate slightly AND pay off high-interest debt, saving thousands in interest.
Important Considerations
Both options put your home at risk
If you can't make payments on either a HELOC or a refinanced mortgage, you could lose your home. Only borrow what you can comfortably repay.
Interest may be deductible if used for home improvements. Consult a tax professional.
Variable rates can increase significantly, raising your payment unexpectedly.
High closing costs on a cash-out refi take years to recoup if the rate savings are small.
Most lenders require you to keep 15-20% equity in your home after borrowing.
Track Your Home Equity with NestorAI
NestorAI helps you understand your home's value and borrowing options:
- Monitor your estimated home value over time
- Track your mortgage paydown and equity growth
- Calculate how much equity you could access
- Store loan documents and terms securely