HELOC vs Cash-Out Refinance — Which Should You Choose?
HELOCs and cash-out refinances both tap your home equity, but differ in rate structure, flexibility, and total cost. See a side-by-side comparison with real numbers.
HELOC Calculator
Revolving line of credit secured by your home equity
What it measures: Monthly interest-only payment during the HELOC draw period and principal+interest payment during repayment.
✓ Use when
- You need flexible access to funds over time (renovations, tuition)
- You only want to borrow — and pay interest on — what you actually use
- You want to preserve your existing low-rate first mortgage
- You expect to repay quickly
✗ Limitations
- Variable interest rate — payment fluctuates with prime rate
- Payment jumps significantly when repayment period begins
- Lender can freeze or reduce the line if home values drop
Blended Rate Calculator
See the true combined cost of your first mortgage + HELOC
What it measures: The weighted average rate across your first mortgage and HELOC balance — the rate a cash-out refinance must beat to make financial sense.
✓ Use when
- You already have a first mortgage and HELOC
- Evaluating whether to combine both into a cash-out refinance
- Reporting your aggregate borrowing cost to a financial advisor
- Comparing your combined rate against current refinance offers
✗ Limitations
- Does not include fees or insurance in the rate
- HELOC's variable rate means the blended rate changes over time
Key difference
A HELOC is flexible and preserves your first mortgage rate, but carries a variable rate and payment risk. A cash-out refinance gives you one fixed payment but replaces your existing mortgage — potentially at a higher rate if your first mortgage rate is already low.
Worked Example
Scenario
$280,000 first mortgage at 3.5% (2021 vintage) + $60,000 HELOC at 8.75% (current prime-based). Cash-out refinance rate today: 6.75% on $340,000.
Blended rate on current loans = 4.26% (low first mortgage dominates)
Cash-out refi rate = 6.75% — 2.49 percentage points higher than blended rate
Interpretation
The cash-out refinance at 6.75% is far more expensive than keeping the 3.5% first mortgage. Even with the HELOC at 8.75%, the blended rate of 4.26% is much lower. Keep the HELOC separate.
Bottom line
If you have a low-rate first mortgage, almost never replace it with a cash-out refinance at today's rates. Use the Blended Rate Calculator first — if your blended rate is already below current market rates, a HELOC is likely the better choice.