Cash-Out Refinance vs. HELOC: Key Factors to Consider

person counting money

In need of some cash to help you cover expenses or consolidate debt? Consider cash-out refinance or HELOC.

But of course, understanding which one to go with is no simple decision. Here, we dive into cash-out refinance vs. HELOC. Specifically, what they are and their similarities and differences.

All of these discussion points are intended to help you become more knowledgeable on these two options and ultimately make the decision that suits you best. If you have any questions along the way, reach out to a trusted loan officer. Your officer will consider your unique situation to help you make the right decision.

What Is Cash-Out Refinance?

A cash-out refinance is a mortgage refinancing option that lets you convert your home equity into cash. You can use this cash to help you cover home improvement expenses, consolidate debt, and more.

Here’s how cash-out refinancing works:

  • You take out a new mortgage. This mortgage is larger than your initial mortgage balance. The difference between these two mortgages is paid out to you in cash.
  • Your lender will determine how much cash you are eligible to receive. They will consider cash-out refinance requirements and factors such as loan-to-value (LVT) ratio and your credit profile. See if you qualify.
  • Lenders generally require borrowers to maintain at least 20% equity in your home. Thus, you can receive 80% of your home equity. You may qualify for up to 100% financing if you’re a veteran.

Reasons that Merit Cash-Out Refinance

Cash-out refinancing can be done for a variety of purposes that include:

  • Home improvement: If you’re looking to upgrade your home and improve its value, cash-out refinancing can be an optimal way to fund these expenses.
  • Debt consolidation: If you have various debts such as credit cards, student loans, personal loans, and more, cash refinancing can consolidate these into a single loan. Refinancing into a single, lower interest-rate loan can help you pay off your debts faster.
  • Investment purposes: Some individuals use their refinanced cash to purchase more property and expand their real estate portfolio. They generally take a cash-out loan on their current home to purchase property with cash.

What Is HELOC?

HELOC stands for home equity line of credit. It’s a line of credit where you borrow against the current equity of your home, which is used as collateral.

HELOCs work much like credit cards; they provide you with a revolving credit line to use for expenses or consolidate debt. As you repay your loan, the amount of available credit replenishes. Thus, you can borrow as little or as much as you need throughout the draw period.

There are two phases of HELOC:

  • Draw period: Typically 5–10 ten years, this draw period is a time where you can access your available credit as you choose.
  • Repayment: Once the draw period is done, you can no longer access additional funds and must begin making principal-plus-interest payments until the balance is paid off.

Banks generally offer various ways for you to access HELOC funds, such as online transfer, check, or using a credit card connected to your account.

Home Equity Loan vs. HELOC

Keep in mind, a HELOC is not the same as a home equity loan. A HELOC is a type of home equity loan.

While both are types of loans that rely on home equity, a home equity loan specifically gives you a lump sum upfront (rather than a revolving credit line). You are then expected to make fixed payments over the life of the loan.

Cash-Out Refinance vs. HELOC: What’s Better?

So what’s better—cash-out refinance or HELOC? It all depends on your financial situation, what you’re willing to risk, and what you can realistically afford.

Below we flesh out similarities, differences, and factors you should consider to help you make the right decision:


  • Both cash-out refinancing and HELOC are ideal for those looking for cash flow.
  • Both can be used as a form of debt consolidation.
  • You must qualify based on your income, credit, assets, and home value.
  • You will use up available equity in your home.
  • Your home is used as collateral.


  • While cash-out refinancing provides borrowers with a lump sum, a HELOC lets homeowners borrow money against their credit line at any time. This makes HELOCs a popular choice for those who need financial help as emergencies arise.
  • Cash-out refinancing includes principal and interest, whereas a HELOC starts as interest only.
  • Cash-out refinancing typically has a fixed interest rate, and a HELOC generally comes with a variable interest rate.
  • With a cash-out refinance plan, you are extending the mortgage loan term. With a HELOC, you are adding a second loan rather than extending the first loan term.
  • With a cash-out refinancing plan, you make fixed monthly payments. A HELOC requires interest-only payments during the draw period. During the repayment phase, you pay both the loan principal balance and the interest.

Factors You Should Consider

  • Loan terms: If you cannot commit to an extra monthly expense (HELOC), cash-out refinancing may be a more realistic option. As mentioned above, cash-out refinancing extends the timeframe of your existing mortgage loans. You’ll have a fixed rate each month.
  • Payment options: Need a one-time lump sum for certain expenses? A cash-out refinance might be the better option. Prefer to have access to funds over a specific time frame? A HELOC may work better. You’ll have a draw period that typically lasts up to 10 years.
  • Compare rates: A cash-out refinance makes sense if you can qualify for a lower interest rate on your prospective new mortgage. HELOC comes with variable rates, but it might provide you access to more equity overall.

3 Questions to Ask When Considering HELOC vs. Cash-Out Refinance

When speaking with a loan officer, it helps to come prepared with questions. Here are a few to help you get started:

1. What does the interest rate look like over the life of my prospective cash-out refinance loan?

Keep in mind, your refinancing may come with a longer payment timeline. You don’t want to pay more interest over the lifetime of this loan (compared to your current mortgage), so this is essential to ask. Knowing all the costs in the beginning sets you up for success.

2. What are your draw and repayments phases like?

Different financial institutions may come with unique draw and payment timelines and standards. If you’re interested in getting a HELOC, discover exactly what these terms are to ensure you’re making a realistic decision.

3. What are the pitfalls of cash-out refinancing and HELOCs?

The core answer is simple: both are drawing on equity you have already worked hard to earn. Whether doing so is ultimately a wise course of action for you is a question for a good loan officer you can trust to provide an honest answer.

Partner with a Trusted Loan Officer

Deciding between a cash-out refinance and HELOC entails careful consideration and thought. It helps to seek the advice of a trusted loan officer. Direct Mortgage has you covered.

Find a loan officer today to make the right decision.