Comprehensive Guide
Learn more in our Loans & Mortgage Guide.
How it works
Choosing between a cash-out refinance and a HELOC is deciding WHICH dollars pay for your equity withdrawal: a refinance reprices every dollar of your existing mortgage at the new market rate, while a HELOC layers a floating second lien on top and leaves the cheap first untouched. The right frame is incremental cost — what each route costs BEYOND continuing exactly as you are — because headline comparisons of monthly payments systematically hide the refinance's central hazard: rate-reset contagion. This calculator computes that increment properly. It projects your current loan's remaining interest, then adds the refinance path's fresh 30-year interest on balance-plus-cash along with closing costs assumed near 2% of the new loan; the difference is the refi's true price tag for the cash. Against it stands the HELOC's own interest across a modeled 15-year repayment. The defaults dramatize the usual verdict — refinancing a 4.5% balance to 6.5% to extract $50,000 burns roughly a quarter-million of incremental interest, where the HELOC's second-lien interest totals nearer $40,000 — but the logic generalizes: whenever your first-mortgage rate sits meaningfully below market, keeping it intact wins. When market rates approach or undercut yours, the calculus flips, and the refinance's lower fixed rate plus consolidation benefits legitimately take over.Formula
Refi extra = [interest(new 30-yr loan at refi rate) + ~2% closing] − interest(current loan remaining) | HELOC extra = interest(cash, heloc rate, 180 mo)
Tips
- Never refinance a below-market first mortgage just to reach cash — layer instead.
- HELOC rates float: mentally add 2 points before trusting the payment.
- Refi closing costs run 2–5% of the new loan; demand the Loan Estimate.
- Model the refi's term reset — fresh 30 years quietly extends your payoff age.
- Small, fast-payoff withdrawals favor HELOCs; large permanent ones favor refis.
Frequently asked questions
Is a HELOC cheaper than a cash-out refinance?
When your existing rate beats the market, almost always. Extracting $50,000 via refi from a 4.5% mortgage reprices the whole $330,000 at 6.5% — about $251,000 of incremental interest plus closing — while a HELOC at 8.75% repaid over 15 years costs roughly $40,000. The spread narrows only as market rates approach your current one.
Why is refinancing a low-rate mortgage so costly?
Because the new rate applies to EVERYTHING. You are not borrowing $50,000 at 6.5%; you are converting $280,000 of 4.5% debt into 6.5% debt and adding $50,000 — the extra percentage points compound across hundreds of thousands for decades. That contagion effect dwarfs the cash benefit in most below-market scenarios.
How do closing costs compare between the two?
Refinancing carries full mortgage costs, typically 2–5% of the new loan — $6,600–$16,500 on a $330,000 deal — including appraisal, title and origination. HELOCs often advertise zero or low closing, though watch annual fees, early-closure penalties and higher rates that quietly recover the waived costs over time.
What are the risks of a HELOC?
Primarily rate float: payments track prime, so borrowing priced at 8.75% can drift upward without warning, stressing budgets mid-loan. Additional risks include draw-period expiration snapping payments upward, temptation of re-borrowable credit, and the identical collateral consequence — defaulting risks the house either way. Discipline requirements are higher, not lower.
When does a cash-out refinance actually make sense?
Three cases: your current rate sits at or above market, so resetting costs little; the cash funds something durably valuable — a renovation adding equity, high-rate debt consolidation at scale; or you want one fixed payment and finished borrowing. Outside those, layering a second lien preserves the cheaper first mortgage intact.