HELOC, refinance or home equity loan: What’s the best way to borrow against your home?

Homeowners are sitting on a record $18 trillion in home equity, but which option makes sense — and at what rate — depends on one thing: whether your current mortgage rate is better or worse than what’s available today. “Choosing between a home equity loan, HELOC or cash-out refinance isn’t a one-size-fits-all decision,” says Tim Choate, founder and CEO of Red Awning, a platform for short-term vacation rental owners and property managers. “Each option has unique characteristics that align with different financial needs, risk profiles, and flexibility requirements.”

Let’s explore those differences — and how to weigh home equity loans and HELOCs vs. cash-out refinances.

Should you keep your mortgage rate or replace it? Start here.

If you bought or refinanced between 2020 and 2022, there’s a good chance you’re sitting on a mortgage rate below 4% — well under today’s average in the high 6% range. That gap is the whole decision.

A cash-out refinance replaces your entire mortgage balance at today’s rate, not just the amount you’re pulling out. A HELOC or home equity loan leaves your existing rate untouched, because both are separate loans layered on top of your mortgage.

If your current mortgage rate is at or above today’s average, a cash-out refinance may improve your terms because you’re resetting a rate that was already working against you. If your rate is meaningfully below today’s average — true for most 2020–2022 buyers — a HELOC or home equity loan is the better option. Run the numbers with a refinance calculator before you decide.

HELOC vs. home equity loan vs. cash-out refinance at a glance

There are three main ways to access your home equity and turn it into cash: home equity lines of credit (HELOCs), home equity loans and cash-out refinances. Your home secures all three, and all can be good options if you need to borrow a significant sum: a five-figure amount, at least.

A cash-out refinance replaces your current mortgage with a new one for a larger amount, and you pocket the difference. The other two are loans that you could take out in addition to your primary mortgage, which is why they’re also known as second mortgages.

How do HELOCs work?

A home equity line of credit (HELOC) is a revolving, open line of credit, which functions much like a credit card — you can use it as needed, repaying and then borrowing again. However, a HELOC has some benefits over a credit card. “Typically, the available balance you can spend on a HELOC is higher than a credit card, and the interest rates are lower than credit cards,” says Michael Foguth, president and founder of the Brighton, Mich.-based Foguth Financial Group, a wealth management advisory firm.

HELOCs generally have a variable interest rate and an initial draw period, which can last as long as 10 years. During that time, you can take out funds and make interest-only payments. Once the draw period ends, there’s a repayment period, during which interest and principal are repaid for 10 to 20 more years.

“A HELOC can initially present lower monthly payments due to its variable nature, though borrowers should be mindful of potential rate hikes later,” says Choate. “For those with intermittent financial needs — say, a series of smaller renovations or periodic tuition payments — a HELOC is ideal, as it grants access to funds over time without the need to reapply.”

One downside: It can take several weeks to get approved and funded. “A HELOC still has to go through underwriting like a typical mortgage because you’re using equity in [your] home to back up the loan,” Foguth says. Also, it can be easy to get in over your head by tapping the credit line for more money than you need or can repay. The changes in payment amounts can also be challenging to keep up with.

When should I choose a HELOC?

• You want to draw at your own pace. HELOCs let you take out cash multiple times, as needed. Home equity loans and cash-out refinancing only offer lump sums.
• You can afford a second monthly payment. You can borrow a HELOC in addition to your current mortgage, so you’ll need to be able to afford an extra monthly bill.
• You don’t mind a variable interest rate. The interest rate on HELOCs fluctuates with the market, which means the rate (and therefore, your payment) could rise. Only consider a HELOC if you can handle an unpredictable payment.

How do home equity loans work?

A home equity loan allows you to borrow funds in a lump sum. You repay the money over a set period, typically ranging from five to 30 years, at a fixed interest rate.

However, you typically end up paying a higher interest rate for a home equity loan than for a mortgage.“It has to be that way because the lender is taking more risk,” says Foguth. “The home equity loan takes a second position to your mortgage. If you default, the lender who holds your mortgage gets their money back before the lender who provided the home equity loan.”

When should I choose a home equity loan?

• You want predictable monthly payments. Like your primary mortgage, the same amount is due each month for the life of the loan. “It’s particularly favorable for borrowers looking to avoid market fluctuations that could increase repayment costs over time,” says Choate. “With rates now more attractive, this option serves well for substantial one-time expenses like home renovations or debt consolidation.”
• You can afford a second monthly payment. Taking out a home equity loan means you will be making two monthly home loan payments: one for your original mortgage and one for your new equity loan. Before you sign, crunch the numbers to be sure you can actually afford the additional obligation.
• You don’t want to change your mortgage terms. A home equity loan exists side-by-side with your mortgage and doesn’t affect it in any way. Aside from using the same property as collateral, it’s a separate loan. In contrast, a cash-out refinance replaces your existing mortgage with a new one and resets your mortgage terms in the process, which might not be ideal for everyone.

How do cash-out refinances work?

A cash-out refinance carries a risk the other two options don’t: It resets your entire mortgage balance at today’s rate, not just the amount you’re pulling out. If rates have risen since you took out your original mortgage — the case for most homeowners who bought or refinanced between 2020 and 2022 — you could end up paying more interest over the life of the loan, even after accounting for the cash you receive.

You’ll also pay 2% to 5% of the total loan amount in closing costs — $6,000 to $15,000 on a $300,000 loan — regardless of how the new rate compares to your old one. And refinance borrowers overpay more often than most assume. Despite having more time to shop than home buyers, 78.7% of refinancers still paid above the most competitive rate available in 2025, losing an average of $2,462 a year, according to Bankrate’s Hidden Homeownership Tax research. Getting quotes from multiple lenders before you commit is the single best way to avoid becoming part of that statistic.

A cash-out refinance is an entirely new loan that replaces your existing mortgage with a larger one. You receive the difference in a lump sum when you close, and you’ll repay it as part of your monthly mortgage payments. This new loan becomes your primary mortgage; home equity loans and HELOCs, by contrast, exist alongside it.

Since it’s a new mortgage, a cash-out refi requires you to provide proof of income, assets and employment, as well as have a home appraisal and go through underwriting — essentially the same drill as when you got your first mortgage. If your equity falls below 20% after the refinance, a lender might also charge you private mortgage insurance (PMI).

When should I choose a cash-out refinance?

• Your current mortgage rate is above today’s average. If interest rates have declined since you took out your mortgage, a cash-out refinance could let you get a better rate and borrow the funds you need at the same time.
• You like to keep it simple. With a cash-out refinance, the mortgage payments and the loan payments are all in one —you’re repaying both simultaneously. HELOCs and home equity loans would be separate, additional payments to track.
• You need stability in your budget. With a HELOC, your monthly payments can vary substantially, particularly when you transition from interest-only payments during the draw period to the repayment period, when you must pay back the principal as well. A cash-out refinance offers long-term, fixed-rate financing at a rate lower than home equity loans.

When a cash-out refinance is the wrong move

• Funding discretionary spending: Using the money for a car, vacation or wedding can turn a depreciating (or already consumed) purchase into 30 years of secured debt. You could ultimately pay far more in interest than the item was ever worth — and unlike a car loan or credit card, your house could be on the line if you fail to make payments.
• Consolidating debt without changing the spending pattern that created it: Rolling credit card debt into your mortgage can lower your interest rate on that debt, but it doesn’t fix the habits that drove up the balance in the first place. If the same spending continues, you could end up with new credit card debt on top of a larger, longer mortgage.
• Tapping equity within a few years of retirement: Increasing your mortgage balance soon before your income is set to drop locks you into higher fixed payments on a reduced income. It also reduces the equity you may need later for long-term care or other retirement needs.

Bottom line

Before you apply anywhere, compare your current mortgage rate against today’s averages. That comparison is what separates the 13% of borrowers who get the best deal from the 87% who don’t.

Frequently asked questions

• How do you calculate the equity you have in your home?

  Home equity is the portion of your home that you own outright. You can calculate home equity as either a number or a percentage of your home’s worth. For example, if your outstanding mortgage balance is $150,000 and your home is valued at $450,000, you have $300,000 of equity. To find your percentage of home equity, divide that dollar figure by the home’s value, then multiply by 100. In the above example, you’d have almost 67% equity in your home.

  Most lenders require that you have a certain percentage of equity in your home before you can start tapping it. They also require that you keep a portion of it untouched — at least 15% to 20%. That means that your loan’s balance must be no more than 80% to 85% of the home’s value. You can’t deplete your entire equity stake, in other words.

• How much equity do I need for a HELOC vs. a cash-out refinance?

  You’ll generally need at least 15% to 20% equity for a HELOC, and at least 20% equity remaining after cash-out for a cash-out refinance. When you apply for a HELOC, lenders typically require that you have at least 15% to 20% equity in your home. When you’re applying for a cash-out refinance, most lenders require you to have at least 20% equity after the cash-out takes place.

• What are the tax implications of tapping your home’s equity?

  Interest on home equity loans, HELOCs and the cash-out portion of a refinance is deductible only if you use the money to buy, build or substantially improve the home securing the debt, and only if you itemize instead of taking the standard deduction.

  Deductible interest is also capped: joint and single filers can deduct interest on up to $750,000 of qualified loans; married filing separately, $375,000. These caps apply to all your home-based debt combined — so a mortgage plus a home equity loan can’t exceed $750,000 total.

  Cash-out refinances are a bit more complex: interest on the portion replacing your original mortgage remains deductible as before. The cash-out portion is deductible only if used for home repairs or improvements — not for debt repayment, emergency expenses or other purposes.