HELOC vs Cash-Out Refinance: Which Saves More in 2026?

When comparing heloc vs cash out refinance options, homeowners must weigh upfront costs against long-term interest expenses. Both let you tap home equity, but the math favors different borrowers depending on how much you need, how long you need it, and what happens to interest rates. In 2026, with the Federal Reserve holding rates higher for longer, the decision has real money consequences.

The average homeowner sitting on $200,000 in equity faces a genuine fork in the road. A cash-out refinance replaces your entire mortgage with a new, larger loan. A HELOC leaves your existing mortgage alone and adds a second lien with a revolving credit line. The difference in total cost can reach tens of thousands of dollars over five years. Understanding the tradeoffs before you sign matters.

HELOC vs Cash Out Refinance: The Cost Structure

A cash-out refinance functions like a standard mortgage replacement. You borrow more than you currently owe, receive the difference in cash, and start fresh with a new rate and term. Closing costs typically run 2% to 5% of the loan amount. On a $300,000 cash-out refinance, expect to pay $6,000 to $15,000 in lender fees, appraisal costs, title insurance, and recording fees.

HELOCs operate differently. Lenders approve a maximum credit line secured by your home equity. You draw only what you need, pay interest only on what you borrow, and can repay and redraw during the initial draw period. Closing costs are minimal—often zero to $1,000—with some lenders waiving fees entirely for well-qualified borrowers.

The catch comes in the interest rate structure. Cash-out refinances offer fixed rates that remain constant for the life of the loan. HELOCs carry variable rates tied to the prime rate plus a margin. When rates rise, your HELOC payment rises with them. When rates fall, you benefit. In early 2026, the prime rate sits at 7.5%, and most HELOCs charge prime plus 0.5% to 2%, putting current HELOC rates between 8% and 9.5%.

The Interest Rate Environment in 2026

Federal Reserve policy has kept mortgage rates elevated through early 2026. Cash-out refinance rates currently range from 6.25% to 7.5% for well-qualified borrowers, depending on credit score, loan-to-value ratio, and loan term. These rates are fixed, meaning your payment stays predictable for 15 or 30 years.

HELOC rates follow the prime rate, which moves with Fed policy. If the Fed cuts rates later in 2026, HELOC borrowers benefit immediately. If rates stay flat or rise, HELOC costs increase. This uncertainty makes HELOCs attractive for short-term borrowing but risky for long-term carrying costs.

The spread between fixed cash-out rates and variable HELOC rates currently favors cash-out refinances by roughly 1.5 to 2 percentage points. On a $100,000 balance, that difference equals $1,500 to $2,000 in additional interest annually. Over five years, the gap compounds.

Loan Size Thresholds: When Each Option Wins

The decision between HELOC and cash-out refinance depends heavily on how much equity you plan to access. Small to medium draws—roughly $50,000 to $150,000—often favor HELOCs. The minimal closing costs offset the higher interest rate, especially if you repay the balance quickly.

Consider a homeowner accessing $75,000 for a kitchen renovation. A cash-out refinance might cost $4,000 in closing fees. A HELOC might cost $500. If the borrower repays the $75,000 within three years, the HELOC likely wins despite the higher rate. The interest differential over 36 months on a declining balance rarely exceeds the upfront savings on closing costs.

Larger draws flip the math. Accessing $200,000 or more makes the interest rate spread meaningful. On a 30-year timeline, a 2% rate advantage on a cash-out refinance saves $80,000 to $100,000 in total interest compared to carrying a HELOC balance indefinitely. The closing costs become noise against the interest savings.

Homeowners accessing $150,000 or more for debt consolidation, major additions, or investment property purchases should run break-even calculations. Divide the cash-out closing costs by the monthly interest savings versus a HELOC. If you recover the closing costs within three to four years, the cash-out refinance typically makes sense.

Timeline Considerations

Beyond cost, timeline shapes the decision. Cash-out refinances reset your mortgage clock. If you have 20 years remaining on a 30-year loan and refinance to a new 30-year term, you add a decade of payments. Even at a lower rate, the extended term can increase total interest paid.

HELOCs preserve your existing mortgage. You keep your current rate on the primary balance and only pay higher variable rates on the drawn amount. For homeowners with low-rate mortgages originated in 2020 or 2021, this matters enormously. Replacing a 3% primary mortgage with a 7% cash-out refinance raises the cost of your entire balance, not just the equity you access.

HELOC draw periods typically last 10 years. During this phase, you can borrow, repay, and re-borrow. After the draw period ends, the HELOC enters repayment, usually over 20 years. Payments jump significantly because you now pay principal plus interest on the full balance. Borrowers who do not plan for this transition face payment shock.

Cash-out refinances offer no such cliff. The fixed payment remains constant. For borrowers who need long-term carrying of the accessed equity, the predictability protects against future rate increases.

Tax Implications for 2026 Filings

The Tax Cuts and Jobs Act of 2017 changed mortgage interest deductibility. Currently, interest on home equity debt remains deductible only if the funds are used to buy, build, or substantially improve the home securing the loan. Using equity proceeds for debt consolidation, education expenses, or investments eliminates the deduction.

This rule applies equally to HELOCs and cash-out refinances. The IRS does not distinguish between the two products for deductibility purposes. What matters is the use of proceeds, not the loan structure. Homeowners financing major renovations can deduct interest on both products, subject to the $750,000 total mortgage debt limit.

For 2026 tax filings, document your use of proceeds carefully. Keep receipts, contractor invoices, and permits. If audited, you must prove the funds improved your primary residence. The deduction can save 22% to 37% of the interest cost depending on your tax bracket.

Risk Factors: What Could Go Wrong

Both products carry foreclosure risk because both use your home as collateral. Miss payments on either, and the lender can force sale of the property. HELOCs carry additional risk from interest rate volatility. A borrower comfortable with $500 monthly payments at 8% faces $650 payments if rates rise to 10.5%.

Cash-out refinances carry rate lock risk. If you wait for rates to fall, you might miss the window entirely. Conversely, locking today at 7% means missing potential savings if rates drop to 5.5% next year. No one knows future rates with certainty. The decision must work at today’s rates.

Overborrowing represents the most common mistake. Homeowners see available equity as a windfall rather than a liability. Accessing $100,000 for discretionary spending—vacations, vehicles, lifestyle inflation—straps your balance sheet without building value. Both HELOCs and cash-out refinances work best when the accessed equity generates returns or reduces higher-cost debt.

Decision Framework: Which Should You Choose?

Choose a HELOC if you need flexible access to smaller amounts, plan to repay quickly, already hold a low-rate primary mortgage you want to preserve, or anticipate rate cuts that would reduce your borrowing cost. The minimal closing costs and revolving structure reward disciplined borrowers with short-term needs.

Choose a cash-out refinance if you need a large lump sum, want payment predictability, plan to carry the balance long-term, or can secure a competitive fixed rate that beats your current weighted average cost of capital. The structure suits homeowners consolidating high-interest debt or funding major renovations that add home value.

Run the numbers for your specific situation. Calculate total cost over your expected holding period, including closing costs, interest at current and projected rates, and any tax benefits. The spreadsheet does not lie. For homeowners with existing low-rate mortgages, a second mortgage might offer better terms than either option by preserving your primary loan.

The 2026 rate environment rewards careful analysis. With the Fed signaling potential cuts later in the year, HELOCs offer upside if you can tolerate payment uncertainty. Cash-out refinances lock in today’s rates, protecting against further increases but eliminating the benefit of potential decreases. Your risk tolerance, timeline, and existing mortgage terms determine which path saves more.

For a comprehensive breakdown of cash-out refinancing strategies, see our complete guide to cash-out refinancing. If you are weighing whether to access equity at all with a low-rate primary mortgage, our equity decision framework helps evaluate whether keeping your current terms makes sense. When you are ready to move forward, our guide to rate lock timing helps you secure the best available rate.