Key Takeaways
- On a $250,000 mortgage at 3.25%, getting $50,000 through a cash-out refinance adds about $80,822 in interest and fees over 5 years; a HELOC adds about $21,250 and a home equity loan about $19,736. The refinance reprices the whole balance, not just the $50,000.
- The monthly payment on $50,000 is $354 interest-only on a HELOC at 8.5%, $434 once it starts repaying over 20 years, $498 on a 15-year home equity loan and $620 on a 10-year one.
- A cash-out refi starts to cost less than a HELOC only when your current mortgage rate is above roughly 7.8% (about 0.3 points over the new cash-out rate, with 3% closing costs, over 10 years). At 6.75% it still costs about $26,136 more over 10 years.
- A lower monthly payment is not a lower cost. At 6.75% the cash-out refi payment ($2,098 on the whole loan) looks no worse than a home equity loan on top of your mortgage ($2,225), but it resets you to a new 30-year term and costs more.
- Interest is deductible only if you spend the money on the home that secures the loan, under IRS Publication 936. Paying off cards or buying a car with it does not qualify.
Table of Contents
- The Three Loans Side by Side on $50,000
- Which One Costs Less Depends on Your Current Mortgage Rate
- What Each Costs Over 5 and 10 Years
- Closing Costs and Where a Cash-Out Refi Breaks Even
- HELOC or Home Equity Loan?
- How Much You Can Borrow
- Is the Interest Tax Deductible?
- Frequently Asked Questions
The question that decides this comparison is not which product has the lowest rate. It is what rate your first mortgage is at. If you hold a 3.25% mortgage and need $50,000, a cash-out refinance moves your entire $250,000 balance to today’s rate and adds about $880 a month to your payment. A HELOC adds $354 a month, interest-only. If your mortgage is already above 7.8%, the answer can flip.
This page runs the same $50,000 through all three loans with the same home, the same balance and the same rates, so the differences you see come from the loans and not from the setup. It covers monthly payments, costs over 5 and 10 years, and the mortgage rate at which a cash-out refinance starts to win.
The Three Loans Side by Side on $50,000
The examples use a $400,000 home with a $250,000 first-mortgage balance and 25 years left on it. That is a combined loan-to-value of 75% after borrowing $50,000, which most lenders will approve for all three products. The rates are round illustration figures, not quotes: 8.5% for the HELOC and the 10-year home equity loan, 8.7% for the 15-year, and 7.5% for the new cash-out mortgage. Swap in the rates you are offered to see how the picture changes.
| HELOC | Home equity loan | Cash-out refinance | |
|---|---|---|---|
| What you get | Revolving line, second lien | Lump sum, second lien | New first mortgage replaces your old one |
| Rate type | Variable | Fixed | Fixed (or adjustable) |
| Rate used here | 8.5% | 8.5% (10-year), 8.7% (15-year) | 7.5% on the whole new loan |
| What the rate applies to | Only what you draw | The $50,000 | The entire $300,000 |
| Closing costs | Usually low; varies by lender | Usually low to moderate; varies by lender | Roughly 2% to 5% of the new loan; $9,000 at 3% |
| Payment on the $50,000 | $354 interest-only, then $434 repaying over 20 years | $620 (10-year) or $498 (15-year) | Payment on the whole loan rises to $2,098 |
| Your current mortgage | Untouched | Untouched | Replaced at today’s rate and a new 30-year term |
The HELOC illustration assumes a 10-year draw period followed by a 20-year repayment period, which is common but not universal. A HELOC rate moves with the prime rate, so every one-point change moves the interest-only payment on $50,000 by about $42 a month. The cash-out refinance row assumes 3% in closing costs on the new $300,000 loan. Closing costs on the HELOC and the home equity loan are set to $0 in the cost tables below, which slightly favors them, so ask each lender for the fees line on the Loan Estimate.
The cash-out rate is an assumption too, and lenders often price cash-out loans a little above plain refinances. For how the process works, see our guide to a cash-out refinance.
Today’s HELOC & Cash-Out Rates
We recommend checking with at least 3 different lenders
Which One Costs Less Depends on Your Current Mortgage Rate
You have a 3.25% mortgage and need $50,000
Here the HELOC and the home equity loan win by a wide margin. Both leave your 3.25% loan alone and add a separate payment for the $50,000. The cash-out refinance throws away the cheap rate on $250,000 to get the money.
| Option | Current mortgage payment | Added payment | Total per month |
|---|---|---|---|
| Keep the mortgage, no borrowing | $1,218 | $0 | $1,218 |
| HELOC, interest-only | $1,218 | $354 | $1,572 |
| Home equity loan, 15-year | $1,218 | $498 | $1,716 |
| Cash-out refinance, $300,000 at 7.5% | replaced | $2,098 |
The refinance raises your payment by $880 a month, against $354 for the HELOC and $498 for the 15-year home equity loan. Over five years the extra interest and fees come to $80,822 for the refinance and $21,250 for the HELOC, a gap of $59,572 on the same $50,000.
If a lender pitched you a refinance, ask for a quote on a standalone home equity loan or line before you sign, then compare the monthly payment and the total cost.
You have a 6.75% mortgage and need $50,000
The picture is closer, and it can mislead. The cash-out refinance payment of $2,098 looks about the same as keeping your $1,727 mortgage and adding a HELOC ($2,081) and lower than adding a 15-year home equity loan ($2,225). Part of the reason is that the refinance stretches the debt over a new 30 years, where your current loan has 25 left.
| Option | Current mortgage payment | Added payment | Total per month |
|---|---|---|---|
| Keep the mortgage, no borrowing | $1,727 | $0 | $1,727 |
| HELOC, interest-only | $1,727 | $354 | $2,081 |
| Home equity loan, 15-year | $1,727 | $498 | $2,225 |
| Cash-out refinance, $300,000 at 7.5% | replaced | $2,098 |
The cost tells a different story. The new rate is 0.75 points higher than the one you have, you pay $9,000 in closing costs at 3%, and you carry a bigger balance for longer. Over ten years the refinance costs $68,636 in extra interest and fees, compared with $42,500 for the HELOC and $33,961 for the home equity loan.
So at 6.75%, a cash-out refinance still does not beat the two second-lien options on cost. It does give you one fixed payment and one lender, which some borrowers value, but it is the more expensive route to the same $50,000.
What Each Costs Over 5 and 10 Years
This table counts only what borrowing the $50,000 adds: interest and fees on the new money, plus, for the refinance, the extra interest on your old balance and the closing costs. It excludes the principal you repay, since that is your own money coming back. The last column shows how much total mortgage debt you still owe after ten years, because a lower interest bill can hide a larger balance.
| Your mortgage rate | Option | Extra interest and fees, 5 years | Extra interest and fees, 10 years | Total debt owed after 10 years |
|---|---|---|---|---|
| 3.25% | HELOC, interest-only | $21,250 | $42,500 | $223,380 |
| 3.25% | Home equity loan, 15-year | $19,736 | $33,961 | $197,552 |
| 3.25% | Cash-out refi, 7.5% | $80,822 | $151,527 | $260,385 |
| 6.75% | HELOC, interest-only | $21,250 | $42,500 | $245,193 |
| 6.75% | Home equity loan, 15-year | $19,736 | $33,961 | $219,364 |
| 6.75% | Cash-out refi, 7.5% | $37,909 | $68,636 | $260,385 |
Two things to read from it. First, the HELOC looks cheap in interest but you still owe the full $50,000 after ten years of interest-only payments, which is why it sits above the home equity loan in the debt column. A borrower who pays the HELOC down on a schedule closes most of that gap. Second, the refinance leaves the largest balance in both scenarios, because it restarts the clock on the entire mortgage.
The HELOC figures assume a flat 8.5%. Because the rate is variable, each point up or down changes the ten-year total by about $5,000. If you can only sleep well with a fixed payment, the home equity loan costs a little more than the HELOC’s starting rate suggests and removes that risk.
Closing Costs and Where a Cash-Out Refi Breaks Even
A cash-out refinance pays its closing costs up front and earns them back only if it saves interest every month afterward. That happens when your current mortgage rate is high enough that replacing it helps. The table shows how many months it takes the refinance to cost less than a HELOC, at four closing-cost levels on the $300,000 loan: 2% is $6,000, 3% is $9,000, 4% is $12,000 and 5% is $15,000.
| Your current mortgage rate | 2% closing costs | 3% closing costs | 4% closing costs | 5% closing costs |
|---|---|---|---|---|
| 7.5% | Does not break even | Does not break even | Does not break even | Does not break even |
| 8.0% | 44 months | 69 months | 98 months | 138 months |
| 8.5% | 25 months | 37 months | 50 months | 64 months |
| 9.0% | 18 months | 26 months | 35 months | 44 months |
At 7.5% the refinance does not catch the HELOC in the 30 years modeled, because the new loan is no cheaper than the one it replaces and it restarts the term. At 8.5% with 3% closing costs it breaks even in 37 months, so if you expect to keep the loan more than three years it comes out ahead. At 9% it takes 26 months. How your current rate compares with the new one is what drives the result.
The break-even rate moves with the new cash-out rate. Using 3% closing costs, this is the current mortgage rate where the refinance starts to cost less than the HELOC:
| Cash-out refinance rate | Break-even mortgage rate, 5 years | Break-even mortgage rate, 10 years |
|---|---|---|
| 6.5% | 6.9% | 6.6% |
| 7.0% | 7.5% | 7.2% |
| 7.5% | 8.1% | 7.8% |
| 8.0% | 8.7% | 8.4% |
The refinance has to improve your rate or come close, and you have to keep the loan long enough to spread the closing costs. Against the 15-year home equity loan the bar is higher still. If you plan to move or refinance again within five years, that argues for a second lien. Our guide to closing costs explains what is in the number.
HELOC or Home Equity Loan?
Once you have decided to leave your first mortgage alone, the choice is between the two second liens. On $50,000 they differ less on cost than on how you use the money.
- Pick the home equity loan if the cost is known. A $50,000 roof or a debt payoff is one number, and a fixed $498 payment will not change. The 10-year version costs $620 a month, which is $122 more but ends five years sooner.
- Pick the HELOC if the cost is staged or uncertain. You draw and pay interest only on what you use, so a project paid in three installments costs less in the first year than a lump sum would. See using home equity for home improvements for how contractor draws work.
- Avoid the HELOC if a payment rise would strain you. At 8.5% the interest-only payment is $354, but the repayment phase raises it to $434 on the same balance, and a rate increase pushes it higher still. Ask the lender whether it can freeze or reduce the line and under what conditions.
- Keep the HELOC for real needs. A line you leave undrawn costs little and is a backup, which is covered in using a HELOC as an emergency fund. Whether a given use makes sense is in best uses for a HELOC.
There is a third option when you want cash without a monthly payment: a home equity agreement. It trades a share of the home’s future value for money now, and it is a different kind of product. We compare it in home equity agreement vs. HELOC.
How Much You Can Borrow
The limit depends on a combined loan-to-value ratio, or CLTV: all the debt on the home divided by its value. Many HELOC and home equity lenders cap CLTV around 85%, and the cap varies with credit score and lender. On a $400,000 home that is $340,000 of total debt, so with a $250,000 mortgage you could borrow up to $90,000 through a HELOC or home equity loan.
A cash-out refinance is stricter. Fannie Mae’s eligibility matrix caps cash-out refinances on a one-unit primary residence at 80% LTV. On the same home that is a $320,000 loan, which means $70,000 of cash after paying off the $250,000 balance, before closing costs come out. Your credit score also moves the rate you are offered, as covered in how your credit score affects your mortgage rate.
To see your own number, enter your home value, mortgage balance and credit score in the HELOC calculator. To compare offers from lenders, use the eligibility check below.
See What You Could Borrow Against Your Home
Compare HELOC and home equity loan options from lenders in your state. Free, no obligation — takes under 2 minutes.
Is the Interest Tax Deductible?
Only for certain uses, and the rule is the same for all three loans. Under IRS Publication 936, interest on a home equity loan, HELOC or the cash-out portion of a refinance is deductible only if you use the money to buy, build or substantially improve the home that secures the loan. The combined limit on qualifying debt is $750,000 for loans taken after December 15, 2017, or $375,000 if married filing separately.
If you spend the $50,000 on a new roof or a kitchen, the interest may qualify. If you use it to pay off credit cards, cover tuition or buy a car, it does not, no matter which loan you pick. You also need to itemize to claim it. Confirm your situation with a tax professional. The project side of this is covered in our home improvement guide.
Frequently Asked Questions
At 8.5%, the interest-only payment is $354 a month on a fully drawn $50,000. When repayment starts over 20 years, the payment rises to $434. Every 1 point change in the rate moves the interest-only payment by about $42.
At 8.7% over 15 years it is $498 a month, and at 8.5% over 10 years it is $620. The rate is fixed, so the payment does not change.
Usually not. On a $250,000 balance, refinancing to $300,000 at 7.5% raises your payment by about $880 a month, and the extra interest and fees come to about $80,822 over five years. A HELOC for the same $50,000 costs about $21,250 over the same period.
At an 85% combined loan-to-value cap, up to $90,000 through a HELOC or home equity loan. A cash-out refinance capped at 80% would allow a $320,000 loan, or about $70,000 in cash before closing costs. Lender caps and your credit score can lower these.
Roughly 2% to 5% of the new loan is a common planning range, which is $6,000 to $15,000 on a $300,000 loan. At 3% it is $9,000. Get the actual figure from the Loan Estimate, which lists the fees line by line.
With a 7.5% cash-out rate and 3% closing costs, your current mortgage rate has to be above about 7.8% for the refinance to cost less over 10 years, and above about 8.1% over 5 years. At 8.5% it breaks even against a HELOC in 37 months.
No. IRS Publication 936 allows the deduction only when the money buys, builds or substantially improves the home that secures the loan. Debt consolidation does not qualify, whether it is done through a HELOC, a home equity loan or a cash-out refinance.
On these rates the home equity loan costs about $19,736 in interest over 5 years against $21,250 for an interest-only HELOC, because it repays principal as it goes. The HELOC has the lower starting payment of $354 against $498, and it is cheaper only if you draw less or pay it down faster.
For the wider picture of how home equity borrowing works, start at our home equity hub.
This page is general information, not financial or tax advice. Rates, fees, loan limits and tax rules vary by lender, location and borrower, and the figures here are illustrative. Compare written Loan Estimates from more than one lender before you decide.
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