HELOC or cash-out refinance?

A home equity line of credit (HELOC) and a cash-out refinance can raise the same cash from the same house. They do it in opposite ways, and the difference is not mainly the rate on the new money.

The deciding question: what happens to your existing rate

A cash-out refinance pays off your mortgage and replaces it with one new, larger loan: the old balance plus the cash. Every dollar you owe moves to the new rate, fixed from closing.

A HELOC leaves your mortgage exactly as it is and adds a separate line beside it. Only the new money carries the new rate, and that rate is usually variable.

So the comparison is not the HELOC rate against the cash-out rate. It is the cash-out rate on everything against your current rate on the old balance plus the HELOC rate on the new money. Owe $280,000 at 3.25% and borrow $60,000 more: a HELOC at 8.25% blends to about 4.1% across the $340,000, while a 6.5% cash-out puts all $340,000 at 6.5%. The HELOC carries the higher rate, yet over seven years it costs about $63,000 less in interest and fees, because it leaves the 3.25% alone. (That is the calculator's example: 24 years left on the mortgage, an interest-only HELOC with $500 of fees, and $7,500 of refinance closing costs.)

When each one wins

A cash-out refinance tends to win when:

• your current rate is at or above what a refinance would charge, so repricing the old balance costs nothing or saves money;
• the cash is large next to the mortgage, so the old balance carries less weight;
• you want one fixed payment and will keep the loan long enough to spread the closing costs.

A HELOC tends to win when:

• your current rate is well below today's, which is the case above;
• the amount is modest, or you will repay it within a few years;
• you want to draw only what you need, when you need it.

The HELOC or cash-out refinance calculator compares the two over the years you expect to keep the loans, and finds the break-even HELOC rate: held above it for that long, the cash-out refinance costs less. It also shows what is still owed at the end, because a fresh 30-year refinance usually owes more after a few years than the shorter mortgage it replaced. A lower payment can partly be a longer loan.

How a HELOC rate works

The CFPB's HELOC booklet explains the pricing: "A variable interest rate generally has two parts: the index and the margin." The index tracks market rates: "Common indexes include the U.S. prime rate and the Constant Maturity Treasury (CMT) rate." And "The margin is an extra percentage that the lender adds to the index." The margin is the part to compare between lenders.

The prime rate is set by banks, not by the Federal Reserve. In the Fed's words: "Although the Federal Reserve has no direct role in setting the prime rate, many banks choose to set their prime rates based partly on the target level of the federal funds rate." The convention holds: when the Fed raised its target range on 17 September 2026, the prime rate moved the same day, from 6.75% to 7.00%, three points above the top of the new range. A HELOC priced at prime plus a margin moves with it. The calculator's Fed-move table assumes exactly that, one for one, within any cap or floor.

A cash-out refinance's fixed rate does not move after closing. Nor do new mortgage rates follow the Fed one for one: they are set in long-term markets. The St. Louis Fed puts it plainly: "when the Fed changes their monetary policy stance you don't usually see immediate movement in mortgage interest rates." Between September 2024 and January 2025 the Fed cut its target by a full point, from a 5.50% top to 4.50%, while the average 30-year mortgage rate rose from 6.20% to 6.93%. Waiting for a Fed cut to make a cash-out refinance cheaper is a bet on a link that is loose.

Variable-rate risk, and lines that can be frozen

A HELOC's rate can move for as long as you owe on it. Federal rules require a dwelling-secured loan whose rate can rise to state "the maximum interest rate that may be imposed," so every HELOC has a lifetime cap: ask what yours is, and run the calculator at it.

The line itself is not guaranteed either. Regulation Z lets a lender "prohibit additional extensions of credit or reduce the credit limit" during any period in which, among other things, "the value of the dwelling that secures the plan declines significantly below the dwelling's appraised value," or the lender "reasonably believes that the consumer will be unable to fulfill the repayment obligations under the plan because of a material change in the consumer's financial circumstances." Do not plan around money you have not drawn yet.

Many HELOCs are interest-only during the draw period, and the payment jumps when repayment starts. Using home equity to pay off credit cards covers what that does.

Fees and closing costs

A cash-out refinance carries a full set of closing costs, the same kind as any mortgage: lender fees, appraisal, title, recording. Rolling them into the loan avoids paying at closing but adds them to the balance at the new rate.

HELOC costs vary by lender. In the CFPB's words: "Some lenders waive some or all of the up-front costs for a HELOC. Others may charge fees." It lists "a fee for a property appraisal," "an application fee, which might not be refunded if you are turned down," and closing costs, and it warns to check "if annual maintenance fees or other fees apply, even if you are not actively using the credit line." Ask too about early-termination fees.

Tax treatment

Neither option makes interest deductible by itself. IRS Publication 936 says you "can't deduct home mortgage interest unless" you "itemize deductions on Schedule A," and that interest on home equity loans and lines is "deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer's home that secures the loan."

A cash-out refinance follows the same logic: the new debt "will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing." Cash taken out for anything other than buying, building or substantially improving the home earns no deduction, under either option.

VA and FHA cash-out refinancing

VA cash-out refinances can borrow up to 100% of the home's value, against 80% for a conventional Fannie Mae loan and 80% for FHA. The VA limit includes the funding fee: "any portion of the funding fee that would cause the new loan amount to exceed 100 percent of the reasonable value of the property must be paid in cash at the loan closing." VA allows up to 100%, but lenders can set a lower maximum of their own (a lender overlay), so ask yours.

The funding fee on a VA cash-out refinance is 2.15% of the loan the first time you use the benefit and 3.3% after that, unless you are exempt. Those rates apply to loans closed before 9 June 2034, when the statute steps them down. On a $340,000 loan, first use, that is $7,310, which the calculator adds when you choose VA.

An FHA cash-out refinance pays FHA's upfront mortgage insurance premium, 1.75% of the loan, which HUD charges on "All Mortgages" except a few special cases. It is financed on top of the 80% limit: HUD measures that limit on "the amount prior to the financing of the Upfront Mortgage Insurance Premium". The calculator adds the annual premium too: 0.5% of the balance a year on a typical 30-year loan, for 11 years.

Each program also has conditions beyond the loan-to-value cap. Fannie Mae requires an existing mortgage being paid off to be at least 12 months old; FHA requires the home to have been your principal residence for the previous 12 months, with at least six payments made on the current loan.

Sources: Consumer Financial Protection Bureau, What you should know about Home Equity Lines of Credit (2022). Federal Reserve, What is the prime rate, and does the Federal Reserve set the prime rate?; the bank prime loan rate and the federal funds target range from the Federal Reserve's H.15 via FRED (DPRIME, DFEDTARU), and the 30-year rate from Freddie Mac's Primary Mortgage Market Survey via FRED (MORTGAGE30US). Federal Reserve Bank of St. Louis, What Determines Mortgage Rates? (October 2026). 12 CFR 1026.30 and 12 CFR 1026.40(f)(3)(vi) (Regulation Z). IRS Publication 936 (2025). 38 CFR 36.4306 for the VA limit; VA's funding fee chart and 38 U.S.C. § 3729(b)(2) for the fee. Fannie Mae Eligibility Matrix (August 2026) and Selling Guide B2-1.3-03; HUD Handbook 4000.1, II.A.8.d.v and Appendix 1.0 (Update 18).