Okay, so I was meeting with my Master’s of Social Work (MSW) cohort, and we got into this discussion about financial stress and housing decisions. One of my classmates mentioned she's sitting on nearly $200,000 in home equity but can't figure out whether a cash-out refinance or HELOC makes more sense for her kitchen renovation. The textbook answer is pretty straightforward, but the real-world application? That's where things get complicated.
By the end of 2024, U.S. homeowners had accumulated approximately $35 trillion in total home equity according to the Federal Reserve Bank of St. Louis. That's not a typo. With mortgage-holding homeowners averaging about $307,000 in equity per Cotality's Q2 2025 data, there's never been a better time to understand your borrowing options.
Here's the thing though: choosing between a cash-out refinance and a home equity line of credit isn't just about rates and terms. It's about your financial goals, your comfort with risk, and honestly, how you sleep at night knowing you've got debt secured by your home.
Let me simplify this for you.
Think of it like this: you're trading in your current mortgage for a brand new one that's bigger than what you owe. The difference between the new loan amount and your old mortgage balance comes to you as cash at closing.
Here's a real example from something I saw recently during my training at AmeriSave. A borrower had a home worth $450,000 with $200,000 remaining on their mortgage. They refinanced to a new loan of $320,000 (keeping that required 20% equity cushion). After paying off the old $200,000 mortgage, they walked away with $120,000 in cash, minus closing costs.
The process mirrors getting your original mortgage because, well, you're getting a new mortgage. You'll submit an application, provide income documentation, undergo a credit check, and your home will need a fresh appraisal. Most lenders, including AmeriSave, require you to maintain at least 20% equity in your home after the refinance completes.
As of November 2025, average cash-out refinance rates sit around 6.77% to 7.01% according to industry averages from Freddie Mac, which represents a slight premium - typically 0.125% to 0.25% higher - compared to standard rate-and-term refinances per Experian data. Lenders charge this premium because they're taking on additional risk with the larger loan amount.
Getting approved isn't automatic, even with substantial equity. Here's what most lenders look for:
A home equity line of credit works more like a credit card that's secured by your house. You get approved for a maximum credit limit based on your available equity, and then you can borrow against that line as needed. The key difference? You only pay interest on what you actually use, not the full credit limit.
I was just in class learning about systems thinking, and HELOCs are a perfect example. They're designed with flexibility as the core feature. You borrow what you need when you need it, which can be brilliant if you're managing a project with unpredictable costs or if you want an emergency cushion available.
According to Curinos data from early November 2025, the average HELOC rate is 7.64%, down from over 8% earlier in the year. These rates are variable, meaning they fluctuate with the prime rate, which currently sits at 7.00% as reported by multiple financial institutions in November 2025.
HELOCs operate in two distinct phases that fundamentally change your payment obligations:
Draw Period (5-15 years): During this initial phase, you can borrow up to your credit limit and typically make interest-only payments. Some borrowers I've worked with love this flexibility. Others find it deceptively easy to accumulate debt without noticing the balance climbing.
Repayment Period (10-20 years): Once the draw period ends, you can no longer borrow additional funds, and your payment structure shifts to include both principal and interest. This is where people sometimes get caught off guard. Payments can jump substantially, sometimes doubling or more depending on how much you borrowed.
Here's what that looks like with real numbers: If you withdrew $50,000 from your HELOC at a 7.50% interest rate, your monthly payment during the 10-year draw period would be approximately $313 (interest-only). But during the 20-year repayment phase that follows, your payment increases significantly as you're now paying down principal plus interest on a compressed timeline.
HELOCs generally have stricter qualification standards than cash-out refinances:
Ready to explore your home equity options? At AmeriSave, we offer personalized guidance to help you choose between a cash-out refinance and other borrowing solutions. Our digital tools make it easy to compare your options and get pre-qualified without affecting your credit score.
Let me break down the critical differences between these two equity borrowing options. I've organized this comparison to help you see where each product shines and where it might create challenges for your specific situation.
Cash-out refinances typically offer fixed interest rates, giving you predictable monthly payments throughout the life of the loan. You'll know exactly what you owe every month for the next 15, 20, or 30 years. According to Bankrate's November 2025 survey data, the national average 30-year fixed refinance APR is 6.63%.
HELOCs almost always come with variable rates tied to the prime rate. When the Federal Reserve adjusts rates (and they made several moves in 2025, including quarter-point cuts in September, October and December), your HELOC rate adjusts accordingly. Some lenders offer fixed-rate conversion options, but these usually come with rate premiums.
Here's where things get interesting. Cash-out refinances reset your mortgage clock. If you're 10 years into a 30-year mortgage and do a cash-out refi into a new 30-year loan, you're starting over. That means 40 years total of mortgage payments. Something to think about if you're hoping to pay off your home before retirement.
HELOCs don't affect your primary mortgage timeline at all. Your first mortgage continues its original schedule while the HELOC runs on its own draw period plus repayment period, typically 25-30 years combined.
With a cash-out refinance, you have one mortgage payment. Done. You're not juggling multiple obligations or remembering different due dates. That single payment includes your refinanced principal balance plus the cash you took out, all amortized over the loan term.
HELOCs give you two separate mortgage payments: your original mortgage plus the HELOC payment. During the draw period, that HELOC payment might be manageable (interest-only), but it increases substantially during repayment. I completely understand the frustration when borrowers realize they're effectively paying on two loans simultaneously.
Cash-out refinances give you a lump sum at closing. That's it. Need more money later? You're refinancing again with new closing costs and a new application process.
HELOCs provide ongoing access during the draw period. Borrow, repay, borrow again. The revolving credit structure means your equity line remains available as long as you're in the draw period and making required payments. This flexibility is unmatched for projects with uncertain costs or for maintaining an emergency fund.
Cash-out refinances come with the full suite of mortgage closing costs, typically 2-5% of the new loan amount. On a $300,000 refinance, you're looking at $6,000 to $15,000 in upfront costs, though these can usually be rolled into the loan.
HELOCs generally have lower upfront costs, sometimes none at all, though some lenders charge application fees, annual fees, or early closure penalties. Read the fine print here. That "no closing cost" HELOC might require you to keep the line open for a minimum period or face a penalty.
I mentioned this earlier, but it bears repeating because it's often the deciding factor. Cash-out refinances typically require a 620 minimum credit score for conventional loans. HELOCs set the bar higher, usually 680 minimum, often 720 at major lenders.
If your credit score sits in that 620-680 range, a cash-out refinance might be your only realistic option.
Let's move beyond the basics and dig into the practical considerations that should guide your decision. Think of these as the questions I'd ask if you were sitting across from me in a consultation.
Are you planning to live in this home for the next decade, or might you sell in 3-5 years? This matters more than most people realize.
With a cash-out refinance, you're paying closing costs upfront and presumably securing a new 15- or 30-year mortgage. Those closing costs take years to recoup through lower rates or cash accessed. If you're selling soon, you might never break even on those costs.
HELOCs with minimal upfront costs make more sense for shorter timelines, especially if you only need equity access temporarily and can pay it down before selling.
Lump sum need? Cash-out refinance. Think major one-time expenses like debt consolidation, buying an investment property, or a complete home renovation with a fixed budget.
Ongoing or unpredictable costs? HELOC. This works beautifully for phased renovations, college tuition spread over multiple years, or maintaining an emergency fund for unexpected expenses.
I remember this one borrower who took out a HELOC thinking they'd use it for kitchen upgrades over 2-3 months. Two years later, they'd borrowed against it for their daughter's wedding, a car repair, medical bills, and yes, eventually, the kitchen. The flexibility was valuable, but the running balance kept growing because they treated it like available cash rather than debt.
The Federal Reserve cut rates by a quarter point three times in 2025, and market watchers anticipate potential additional cuts before year-end according to multiple financial publications. If rates continue declining, HELOCs become increasingly attractive since your rate automatically adjusts downward.
However, if you believe rates have bottomed out or might increase, locking in a fixed-rate cash-out refinance protects you from future rate hikes. Nobody has a crystal ball here, but understanding the rate environment matters.
Be honest with yourself about risk tolerance. Can you handle payment fluctuations? If your HELOC rate increases by 2 percentage points, does that create financial stress or just annoyance?
Fixed-rate cash-out refinances eliminate this uncertainty entirely. You know your payment on day one and day 3,650. For borrowers who value predictability or operate on tight budgets, this psychological comfort is worth something.
The IRS treats these products differently for tax purposes. Under current tax law, you can deduct interest paid on either a cash-out refinance or HELOC if you use the funds for home improvements that substantially increase your property's value. However, if you use the money for debt consolidation, vacations, or other purposes, that interest generally isn't deductible.
Wait, let me clarify that point about home improvements. The IRS requires that the improvements "substantially add to the value of your home, considerably prolong its useful life, or adapt it to new uses." Basic repairs and maintenance don't qualify.
Always consult with a tax professional about your specific situation. Tax laws evolve, and your individual circumstances matter significantly.
This might be the most important factor right now. If you secured a mortgage rate below 5%, and according to ICE Mortgage Technology data, approximately 70% of current homeowners with mortgages have rates below that threshold, giving that up in a cash-out refinance makes little financial sense.
Let's say you have a 3.5% mortgage rate from 2021. Refinancing to a 6.77% cash-out refinance means you're paying substantially more interest on your entire loan balance, not just the cash you're taking out. That extra 3.27 percentage points on, say, $200,000 existing balance costs you roughly $6,540 per year in additional interest.
In that scenario, a HELOC makes more sense because you preserve your low-rate first mortgage and only pay current market rates on the additional amount you borrow.
Home values in your area matter. According to Cotality's Q2 2025 report, homeowners saw an average annual equity decrease of $9,200, though this varied dramatically by location. Florida homeowners lost an average of $32,115 in equity year-over-year, while Connecticut homeowners gained $37,350.
If you're in a declining market and you lock in a large cash-out refinance at 80% LTV, you might find yourself underwater if values drop further. HELOCs offer slightly more flexibility since you're not required to borrow the full credit line.
At AmeriSave, our digital mortgage platform makes it simple to explore cash-out refinance options. Get a rate quote in minutes and compare your potential savings with expert guidance from our team.
Let me walk you through some situations I've encountered. These aren't hypothetical - they're composites of actual borrower situations, modified to protect privacy.
Situation: Homeowner needs $75,000 for a kitchen and bathroom remodel. Current mortgage is $180,000 at 3.25% (locked in during 2021). Home value is $400,000.
Likely Best Option: HELOC
Why: That 3.25% mortgage rate is golden. A cash-out refinance would replace the entire $180,000 balance with a new loan at current rates around 6.77%, meaning they'd pay roughly an extra $6,336 annually in interest on their existing balance alone. A HELOC at 7.64% only charges current rates on the $75,000 borrowed, costing about $5,730 annually in interest during the interest-only period. They preserve their low-rate first mortgage and save thousands.
Situation: Homeowner has $45,000 in high-interest credit card debt (average 22% APR) and wants an additional $20,000 for emergency savings. Current mortgage is $240,000 at 6.5%. Home value is $425,000.
Likely Best Option: Cash-Out Refinance
Why: They're already at a market-rate mortgage, so there's no low rate to preserve. Consolidating the $45,000 credit card debt into a 6.77% mortgage saves about $6,853 annually in interest. The single payment structure removes the temptation to run up credit cards again while maintaining HELOC payments. They get the full $65,000 needed in one transaction with one closing.
Situation: Parents need approximately $30,000 annually for their daughter's college expenses. Current mortgage is $290,000 at 4.25%. Home value is $520,000.
Likely Best Option: HELOC
Why: The timing matters here. They don't need all $120,000 upfront - they need it spread over four years. A HELOC lets them borrow each year's tuition as needed, paying interest only on the current balance. During freshman year, they're only paying interest on $30,000, not the full $120,000. Plus, they keep that excellent 4.25% rate on their primary mortgage. As a bonus, if their daughter gets scholarships or financial aid in later years, they don't have to borrow the full amount.
Situation: Homeowner wants $100,000 for a down payment on a rental property investment. Current mortgage is $195,000 at 7.0%. Home value is $450,000.
Likely Best Option: Cash-Out Refinance
Why: Investment properties typically require larger down payments (20-25%), and having that lump sum available makes the purchase smoother. Since their current mortgage rate is already at market levels, refinancing doesn't cost them anything in rate differential. They might even secure a slightly lower rate. The single payment simplifies their monthly obligations, and they can potentially deduct the interest since it's used for investment purposes, though again, consult a tax professional on that.
Let me show you the actual cost difference with a worked example, because numbers make this clearer than general explanations.
Scenario: Home value of $400,000, current mortgage balance of $200,000 at 4.0%, needing $50,000 in cash.
New/Additional Loan Amount
Cash-Out Refinance: $250,000 total (replaces existing)
HELOC: $50,000 (added to existing)
Interest Rate
Cash-Out Refinance: 6.77% fixed
HELOC: 7.64% variable
First Mortgage Payment
Cash-Out Refinance: N/A (replaced)
HELOC: $955/mo. @ 4.0%
New Payment
Cash-Out Refinance: $1,626/mo.
HELOC: $318/mo. (interest-only)
Total Monthly Payment
Cash-Out Refinance: $1,626
HELOC: $1,273
Annual Interest Year 1
Cash-Out Refinance: ~$16,925
HELOC: ~$11,820
Annual Savings
Cash-Out Refinance: N/A
HELOC: $5,105
5-Year Savings
Cash-Out Refinance: N/A
HELOC: $25,525
Cash-Out Refinance:
HELOC:
Result: The HELOC saves $5,105 annually in this scenario while maintaining lower monthly payments ($353 less per month). Over five years, that's $25,525 in savings.
If your current mortgage rate is already at market rates, this math changes completely. That's why your starting point is so important.
It's not about which product is better when you have to choose between a cash-out refinance and a HELOC. It's about which one fits your needs, goals, and level of risk better. Both are great ways to get to your home equity, but they do it in very different ways.
According to recent data from the Federal Reserve, U.S. homeowners had a total of $17.5 trillion in equity as of the second quarter of 2025, according to Cotality reporting. That's a lot of money tied up in real estate. The question isn't whether or not to use it; many homeowners benefit from using their equity wisely. The question is how to get to it in a smart way.
A HELOC usually makes more financial sense than a fixed-rate mortgage if you want to keep your mortgage rate low (below 5%) and need flexibility for ongoing costs. This is because a HELOC has a variable rate and two payments. If you're already at market rates and need a lump sum with payments that are easy to plan for, a cash-out refinance is probably a better option for you.
Talking to a mortgage expert can help with complicated situations. To be honest, most situations are more complicated than they seem at first. At AmeriSave, we can run the numbers for your specific situation and show you exactly how each option affects your monthly budget, total interest costs, and long-term financial picture.
Your house is probably your most valuable asset. You should think carefully about how to use that asset, get accurate information, and get professional advice that is specific to your situation.
No, not at the same time during the same transaction. But you could do a cash-out refinance and then apply for a HELOC later when you have built up some equity. Some borrowers use this method if they have a lot of big bills that come up over time. They refinance to pay for the immediate need and then set up a HELOC for future flexibility. Keep in mind that every application means a credit check and that you have to meet the requirements at that time. You will also need to keep enough equity in both products, which usually means that you need to have at least 20% equity cushion after all of your loans are paid off.
That must have been very stressful for people who don't understand the lien position. Your HELOC is in second place behind your primary mortgage. Most HELOC lenders will only let you refinance your first mortgage if you pay off the HELOC or have them "subordinate" their position, which means they agree to stay in second place behind your new first mortgage. It's not automatic to be subordinate. The lender for the HELOC has to agree, and they may charge fees or say no completely, depending on your equity position and their rules. Some lenders charge subordination fees between $75 and $300. Others may not agree to subordinate if your equity position has changed a lot since you opened the HELOC.
Like purchase mortgages, cash-out refinances usually take 30 to 45 days from application to closing. You are going through a full underwriting, appraisal, title work, and document review. At AmeriSave, we've made this process easier with digital tools, but there is still a minimum amount of time needed to do all the checks and meet all the rules. Because you're not paying off your first mortgage, HELOCs usually close faster, in 2 to 4 weeks. The underwriting is a little easier, but you will still need an appraisal and proof of income. If your paperwork is perfect and you have a lot of equity, some lenders can get you a HELOC in as little as 10 days.
Some lenders let you change the interest rate on part or all of your HELOC balance to a fixed rate, but not all of them do. If you can, you're usually locking in that part at the current fixed rates, which may be higher than what your variable rate was when you switched. Read the terms carefully because some charge conversion fees, which can be anywhere from $50 to $500. Once fixed, that part usually can't be changed back to variable or borrowed again if you pay it down. The part that was changed basically turns into a home equity loan part of your HELOC. If you want to make sure your rates stay the same, ask your lender about this feature when you apply. Not all lenders offer it.
If rates go down a lot, HELOC borrowers benefit right away because their rates change automatically, usually within one or two billing cycles after the prime rate changes. To get lower rates, cash-out refinance borrowers would have to refinance again, which means filling out another application, getting another appraisal, and paying closing costs again (usually 2–5% of the loan amount). If rates go up instead, though, cash-out refinance borrowers are safe, but HELOC borrowers will have to pay more. There is no one right answer. It depends on the direction and size of the changes in rates, how flexible your finances are, and how long you keep the loan. If you don't like taking risks and want to be sure of your payments, the fixed rate is the best choice, no matter what happens to rates in the future.
Yes, for sure. Closing costs for a cash-out refinance on a $300,000 loan usually range from $6,000 to $15,000, depending on where you live, the lender's fees, and whether you buy discount points. This includes appraisal fees ($400–$600), title insurance ($1,000–$3,000), origination fees (which are usually 0.5–1% of the loan amount), recording fees, and other costs. Closing costs for a HELOC are usually much lower, and in some cases, they are even zero if you meet certain conditions, like keeping the line open for a minimum of two to three years. Costs are usually between $500 and $1,500, mostly for appraisal and administrative fees. Some lenders will even waive these fees as part of a promotion, but be on the lookout for annual maintenance fees ($50–$100) or early closure penalties ($250–$500) in the fine print.
Most modern mortgages, even cash-out refinances, don't charge penalties for paying off the loan early. However, some do, especially jumbo loans and some portfolio products. Always check this before you close by looking over your loan estimate and asking your lender directly. If you pay off the loan within the first 3 to 5 years, the prepayment penalty is usually 2% to 3% of the loan balance. If you close your HELOC within a certain time frame (usually 2 to 3 years), you may have to pay a penalty. This keeps the lender from having to spend money to set up your line only to have you close it right away. You can usually pay off your balance at any time without incurring a fee, but closing the line of credit might result in fees. It's usually okay and encouraged to make extra principal payments on either type of loan.
Both products need seasoning periods after bankruptcy or foreclosure, but the times are different. Cash-out refinances usually need to wait 2 to 4 years after bankruptcy discharge (depending on the type of loan) and 3 to 7 years after foreclosure. It takes less time to get an FHA loan than a regular loan. For example, you can get an FHA loan 2 years after Chapter 13 bankruptcy with court permission and 3 years after foreclosure. For a regular loan, you have to wait 4 years after Chapter 7 bankruptcy and 7 years after foreclosure. HELOCs usually have stricter rules, like needing to be 4 to 7 years after bankruptcy and 5 to 7 years after foreclosure. Keep in mind that these are the lowest amounts, and many lenders go above and beyond. Your credit score must also have gone up to the minimum level (620 for cash-out refi, usually 680 or higher for HELOCs), and you must show that you used credit responsibly during the waiting period.
We need to work together to figure this out because it's important. If you don't pay for either of these products, you could lose your home. If you have a cash-out refinance, you only have to deal with one loan and one lender if things get tough. Many lenders, such as AmeriSave, offer ways to help you avoid losing your home, such as forbearance, loan modifications, or repayment plans. If you have a HELOC, you may have to deal with two lenders: your first mortgage company and your HELOC lender. If you can only make one payment, it's usually best to pay off your first mortgage first because it's a bigger debt and your HELOC will be wiped out if your first mortgage lender forecloses. If you don't pay back the HELOC, the lender could theoretically foreclose, but this happens less often because they are in second place. If you're having trouble making payments, the most important thing to do is talk to your lenders right away. Don't wait until you're already behind, because your options will be fewer when you're in default.
Yes, a lot. Your credit score is one of the most important things that will decide if you can get a loan and what interest rate you'll get. People with credit scores above 740 usually get the best rates on cash-out refinances. People with scores between 620 and 680, on the other hand, pay a lot more, usually between 0.5 and 1.5 percentage points more. HELOCs work in a similar way, but they have a higher minimum requirement, usually 680. The difference in rates adds up over time. For example, a 1% higher rate on a $200,000 loan costs an extra $2,000 in interest each year. If you're close to the minimum qualifications, it often makes sense to work on raising your credit score before you apply. Sometimes, a 20-40 point increase can move you into a better pricing tier, which can save you thousands over the life of the loan.
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