HELOC vs Cash-Out Refinance in 2026: Which Is Better?
A HELOC and a cash-out refinance both let you access home equity, but they work differently. One offers flexible credit with variable rates. The other provides a lump sum with fixed payments. Choosing wrong can cost thousands in fees or leave you exposed to rising rates. This guide compares real rates, costs, and scenarios to help you decide.
What Is a HELOC?
A home equity line of credit (HELOC) is a revolving credit line secured by your home. During the 10-year draw period, you can borrow, repay, and borrow again up to your credit limit. You pay interest only on what you use.
After the draw period ends, you enter the repayment period. You can no longer draw funds and must pay principal plus interest over 10 to 20 years. HELOC rates are variable, tied to the prime rate plus a margin. As of February 2026, the prime rate is 6.75%. Most lenders add a margin of 0.50% to 1.00%, giving current HELOC rates between 7.25% and 7.75%.
This variability means your payment changes when rates move. A $50,000 balance at 7.25% costs $302 monthly in interest. If the prime rate increases 1%, that payment rises to $344. Most HELOCs allow interest-only payments during the draw period, keeping monthly costs low but not reducing your principal balance.
What Is a Cash-Out Refinance?
A cash-out refinance replaces your existing mortgage with a new, larger loan. You receive the difference between your new loan amount and your old mortgage balance as a lump sum at closing. Unlike a HELOC, this is a one-time transaction. You cannot borrow additional funds without refinancing again.
Cash-out refinances typically offer fixed rates between 6.5% and 7.5%, depending on your credit score, LTV, and loan type. The rate is usually 0.25% to 0.50% higher than a rate-and-term refinance because lenders view cash-out loans as higher risk. You make one monthly payment that includes principal and interest, gradually paying down the balance over the loan term.
How Much Can You Borrow: LTV Limits
Both products limit how much equity you can access. Lenders express these limits as loan-to-value (LTV) ratios or combined loan-to-value (CLTV) for second liens.
| Product Type | Max LTV/CLTV | Minimum Equity | Key Notes |
|---|---|---|---|
| HELOC (CLTV) | 80% to 85% | 15% to 20% | Some lenders allow 90% with 740+ credit and higher rates |
| Cash-Out Conventional | 80% LTV | 20% | Many lenders overlay 75% max; jumbos often 70% to 75% |
| Cash-Out FHA | 80% LTV | 20% | Standard across lenders; MIP applies regardless of LTV |
| Cash-Out VA | 90% to 100% | 0% to 10% | VA allows 100%; most lenders cap at 90% |
| Investment Property | 70% to 75% | 25% to 30% | Stricter credit and reserve requirements apply |
On a $500,000 home with a $350,000 mortgage balance, an 85% CLTV HELOC limit allows a $75,000 line. An 80% LTV cash-out refinance allows a $400,000 new loan, providing $50,000 cash after paying off the $350,000 balance.
Qualification Requirements
HELOCs and cash-out refinances carry different qualification standards. HELOCs typically require higher credit scores because they are second liens with no primary mortgage payoff.
HELOCs generally require a minimum credit score of 680, with 720 or higher qualifying for the best rates and highest LTVs. Cash-out refinances require 620 minimum for conventional loans, 580 to 620 for FHA, and 620 to 640 for VA. Investment properties require 680 to 720 or higher for either product.
DTI limits run 43% for both products, with some lenders allowing up to 50% if you have strong compensating factors like excellent credit or significant cash reserves. FHA cash-out officially allows up to 50% with compensating factors. VA uses residual income calculations rather than strict DTI caps.
Reserves matter more for cash-out refinances on investment properties, where 6 to 12 months of PITI are typically required. Primary residence HELOCs may require minimal reserves unless your credit is borderline.
Rate and Payment Comparison
| Feature | HELOC | Cash-Out Refinance |
|---|---|---|
| Rate Type | Variable (Prime + 0.50% to 1.00%) | Fixed (6.5% to 7.5%) |
| Current Rate Range | 7.25% to 7.75% | 6.5% to 7.5% |
| Monthly Payment | Interest-only on drawn amount during draw period | Fixed P&I on full loan amount |
| Payment Stability | Changes with rate movements | Fixed for loan term |
| Draw Flexibility | Borrow, repay, re-borrow for 10 years | One-time lump sum only |
HELOCs offer payment flexibility during the draw period. On a $50,000 drawn balance at 7.25%, you pay $302 monthly. If rates rise to 8.25%, that payment increases to $344. Cash-out refinances provide payment stability. A $50,000 cash-out at 7.0% fixed costs approximately $332 monthly in principal and interest over 30 years.
Closing Costs: Real Numbers
HELOCs typically cost significantly less upfront than cash-out refinances.
| Cost Category | HELOC Range | Cash-Out Range | What Affects It |
|---|---|---|---|
| Lender/Origination | $0 to $500 | 0.5% to 1.5% of loan | Credit unions often $0; banks charge 0.5% to 1% |
| Appraisal | $0 to $500 | $400 to $700 | HELOCs may use AVM; cash-out requires full appraisal |
| Title/Escrow | $0 to $1,000 | $800 to $2,000 | HELOCs often title-only; cash-out requires full insurance |
| Recording | $50 to $150 | $100 to $250 | County-specific fees |
| Prepaids/Escrows | None | 2 to 6 months taxes plus insurance | HELOCs have no escrow requirement |
| Annual Fees | $0 to $100/year | None | HELOC maintenance fee if applicable |
On a $300,000 loan amount, cash-out closing costs typically range from $6,000 to $15,000. HELOC closing costs typically range from $0 to $500, with many credit unions offering no-closing-cost options.
HELOCs may also charge inactivity fees of $50 to $100 per year if unused, and early termination fees of $250 to $500 if closed within 3 years. Cash-out refinances carry loan-specific costs: FHA charges 1.75% upfront MIP, VA charges 2.15% to 3.3% funding fee depending on usage, and conventional loans require PMI if LTV exceeds 80%.
Break-Even Analysis: Which Costs Less
The cheaper option depends on how much you borrow, how long you take to repay, and the rate environment.
Example Scenario:
- Home value: $500,000
- Current mortgage balance: $350,000
- Amount needed: $50,000
- HELOC rate: 7.25% starting (Prime + 0.50%), variable
- Cash-out rate: 7.0% fixed
- HELOC closing costs: $0 (credit union promotion)
- Cash-out closing costs: $9,000 (3% of $300,000 loan)
- Repayment period: 5 years
HELOC Path:
You pay interest only on the $50,000 drawn. At 7.25%, monthly interest is $302. If the prime rate increases 0.50% in year 2 and another 0.50% in year 4, your average rate over 5 years is approximately 7.75%. Total interest paid: $19,375. Closing costs: $0. Total cost: $19,375.
Cash-Out Path:
Your new loan is $359,000 ($350,000 payoff plus $50,000 cash plus $9,000 closing costs rolled in). At 7.0% fixed, your monthly payment is $2,388. Over 5 years, you pay approximately $39,250 in principal and interest on the incremental $59,000 borrowed.
In this scenario, the HELOC costs $19,375 versus $39,250 for the cash-out over 5 years, provided you make principal payments and do not extend interest-only payments indefinitely.
When to Choose a HELOC
A HELOC makes sense when:
- You need flexible access to funds over time, not a single lump sum
- You want to preserve a low-rate first mortgage (below 6.0%)
- You are uncertain about the total amount you will need
- You can handle variable payments and rate risk
- You plan to repay the borrowed amount within 5 to 7 years
- You qualify for a no-closing-cost offer from a credit union
The revolving structure works well for phased home renovations, ongoing education expenses, or as an emergency liquidity reserve. You pay nothing until you draw funds, and you only pay interest on amounts actually used.
When to Choose a Cash-Out Refinance
A cash-out refinance makes sense when:
- You need a specific lump sum for a defined purpose
- You prefer payment stability and want to eliminate variable rate risk
- You can secure a comparable rate to your existing mortgage
- You are consolidating high-interest debt (credit cards above 18% APR)
- You want to reset your mortgage term or switch from ARM to fixed
- You plan to stay in the home long enough to recoup closing costs
The fixed rate and single payment structure provide budget certainty. However, you pay closing costs upfront and your monthly mortgage payment increases because you owe more principal.
Real Borrower Scenarios
Scenario 1: Phased Kitchen Renovation
A borrower with a $500,000 home and $350,000 mortgage balance needs $60,000 for a kitchen renovation spread over 12 months. They have a 760 credit score and a 4.5% fixed first mortgage. A HELOC at 7.25% with $0 closing costs allows them to draw $5,000 monthly as contractors bill, preserving their low-rate first mortgage. Total interest cost if repaid in 3 years: approximately $6,500.
Scenario 2: Credit Card Debt Consolidation
A borrower with a $450,000 home and $280,000 mortgage balance has $35,000 in credit card debt at 22% APR. They refinance from a 6.75% mortgage to 7.0% cash-out, raising their monthly payment by $185 but eliminating $775 in monthly credit card payments. Net cash flow improvement: $590 per month. Closing costs of $10,000 roll into the loan. Break-even on interest savings: 18 months.
Scenario 3: Small Single Expense
A borrower needs exactly $15,000 for a roof repair. Their home is worth $400,000 with a $300,000 mortgage. A HELOC at 7.5% with $0 closing costs allows them to borrow and repay within 2 years with total interest of approximately $1,800. A cash-out would cost $7,500 in closing costs on a $315,000 loan—prohibitively expensive for this amount.
FAQ
What is the difference between a HELOC and a cash-out refinance?
A HELOC is a revolving line of credit secured by your home equity, allowing you to draw funds as needed during a 10-year draw period. A cash-out refinance replaces your existing mortgage with a new, larger loan and provides a lump sum at closing.
Which has lower closing costs?
HELOCs typically have lower closing costs, ranging from $0 to $500, with many credit unions offering no-closing-cost options. Cash-out refinances typically cost 2% to 5% of the loan amount due to full mortgage origination, appraisal, and title fees.
What are the LTV limits?
HELOCs typically allow combined LTV of 80% to 85%, with some lenders offering 90% to qualified borrowers. Cash-out refinances typically cap at 80% for conventional and FHA loans, and 90% to 100% for VA loans.
Are HELOC rates higher than cash-out refinance rates?
HELOC rates are typically variable and currently range from 7.25% to 7.75% (Prime + 0.50% to 1.00%). Cash-out refinances offer fixed rates typically between 6.5% and 7.5%. HELOCs may start lower but carry variable risk.
What credit score do I need?
HELOCs typically require 680 minimum, with 720+ qualifying for the best rates. Cash-out refinances require 620+ for conventional, 580+ for FHA, and 620+ for VA loans.
Can I get both a HELOC and a cash-out refinance?
No. A cash-out refinance replaces your first mortgage, which eliminates the lien position needed for a HELOC as a second lien. You must choose one product or complete the cash-out refinance first, then apply for a HELOC.
Is HELOC interest tax deductible?
HELOC interest may be deductible if the proceeds are used to buy, build, or substantially improve your home. Interest on funds used for other purposes is not deductible under current tax law. Consult a tax professional for your specific situation.
How do I decide between a HELOC and cash-out refinance?
Choose a HELOC if you need flexible access to funds over time, want to keep an existing low-rate mortgage, or are uncertain about the total amount needed. Choose a cash-out refinance if you need a lump sum, prefer fixed payments, or can secure a comparable rate to your current mortgage.
What are the risks?
HELOC risks include variable rate increases, payment shock when the draw period ends, and temptation to overspend with available credit. Cash-out refinance risks include higher monthly payments, closing cost burden, and resetting your mortgage term.
How long does each take to close?
HELOCs typically close in 2 to 4 weeks with streamlined documentation. Cash-out refinances typically take 30 to 45 days due to full mortgage underwriting, appraisal, and title work.
