HELOC or cash-out refinance: which way to tap your equity?

How does each one work?

A HELOC is a credit line secured by your home. You draw what you need during the draw period and repay it later. Your first mortgage stays as it is.

A cash-out refinance replaces your current mortgage with a bigger one, and you take the difference in cash. Your rate and other loan terms change, because it's a new loan.

Which costs more to set up?

The CFPB says closing costs for a cash-out refinance are generally higher. A HELOC has its own costs too, such as an appraisal, an application fee and closing costs, so ask for the full figures on each option.

How do the payments compare?

A HELOC usually has a variable rate, and payments often rise when the repayment period starts. A cash-out refinance gives you one new mortgage payment, and the CFPB notes these loans are usually paid back over about 30 years, which may extend how long it takes to pay off your home. Its rate may also be higher than the rate on your current mortgage.

When might each make sense?

If you have a low rate on your current mortgage, a HELOC lets you keep it. If you'd refinance anyway, or need one predictable payment, a cash-out refinance may suit you better. Use the refinance break-even calculator to check whether the new loan's costs pay off.