HELOC vs Cash-Out Refinance: One Could Cost You Your Home

Your home has $100,000 in equity. You could tap it with a HELOC or a cash-out refinance. Both put cash in your hand, but they work completely differently—and choosing wrong can cost you tens of thousands or put your home at risk.

The Quick Comparison

	HELOC	Cash-Out Refinance
How it works	Line of credit (like a credit card)	New, larger mortgage
Interest rate	Variable (changes monthly)	Fixed
Closing costs	Low ($0-500)	High (2-5% of loan)
Access to funds	Draw as needed	Lump sum
Affects your mortgage?	No (separate loan)	Yes (replaces it)
Best for	Ongoing/uncertain needs	One-time large expense

The HELOC Danger: Variable Rates

A HELOC starts with a "draw period" (usually 10 years) where you can borrow as needed and make interest-only payments. Sounds great—until rates spike.

Real HELOC Horror Story

2021: Opened a $80,000 HELOC at 4% variable. Monthly interest-only payment: $267

2023: Rate jumps to 9%. Monthly payment: $600

2024: Draw period ends. Now paying principal + interest: $920/month

Payment increased 245% in 3 years—with no change in balance.

See how much HELOC you qualify for

Calculate your available equity and estimated payments at different rates.

The Cash-Out Danger: Resetting Your Mortgage

A cash-out refinance replaces your current mortgage with a larger one. The difference goes in your pocket. But there's a hidden cost most people miss:

The Term Reset Trap

Before cash-out:

$250K balance, 22 years left

At 4% = $130K remaining interest

After cash-out ($50K):

$300K balance, new 30-year term

At 6.5% = $383K interest

That $50,000 cash actually cost $253,000 in additional interest.

Choose HELOC When:

You have a great rate on your current mortgage you don't want to lose

You're not sure exactly how much you need

You can pay it off quickly (before rates change dramatically)

You want flexibility to borrow, repay, and borrow again

Choose Cash-Out Refinance When:

Current mortgage rates are lower than your existing rate

You need a specific, known amount (like paying off high-interest debt)

You want a fixed rate and predictable payments

You won't be tempted to keep borrowing (HELOC's revolving credit is risky for some)

The Bottom Line

Both options use your home as collateral. Default on either, and you could face foreclosure. The question isn't which is "better"—it's which fits your situation.

Before you tap your equity: Calculate exactly how much you need, how long you'll take to repay it, and what happens if rates rise 3-4%. If those numbers don't work, neither does borrowing against your home.