HELOC vs. Cash-Out Refinance: Which Is Right for You?

When you need access to funds for home improvements, debt consolidation, or major life expenses, tapping into your home’s equity can be a smart strategy. Two of the most common options are a home equity line of credit (HELOC) and a cash-out refinance. While both use your home as collateral, they work differently—and choosing the right one depends on your goals, financial situation, and even how long you plan to stay in your home.

Keep reading to learn more about HELOCs, cash-out refinances, their pros and cons, and other considerations to help you compare the two.

What Is a HELOC?

A HELOC is a revolving line of credit that allows you to borrow against your home’s equity. Much like a credit card, you can borrow, repay, and borrow again up to your limit during the “draw period,” which typically lasts 5-10 years. During this time, many HELOCs require interest-only payments.

Once the draw period ends, you enter the “repayment period,” which usually lasts 10-20 years. During the repayment period, you can’t borrow additional funds and must begin repaying both principal and interest. HELOCs often have variable interest rates, so your monthly payments may change over time.

What Is a Cash-Out Refinance?

With a cash-out refinance, you replace your current mortgage with a new, larger loan. The difference between the two loan amounts is returned to you as a lump sum, which you can use for any purpose. Your new loan will have different terms—such as a new interest rate, loan amount, and monthly payment—and will typically follow a fixed repayment schedule.

Unlike a HELOC loan, a cash-out refinance doesn’t create an additional loan on top of your current mortgage. Instead, it replaces your existing mortgage entirely with a new one.

When a HELOC is the Best Choice

A HELOC can be an ideal option if you need ongoing access to funds, want flexibility in how you borrow, or are planning smaller home improvements over time. Since interest is only charged on what you borrow, a HELOC gives you more control over your total interest costs, especially if you repay the balance quickly.

Because home equity lines of credit often have lower closing costs than refinancing, they can also be more cost-effective for short-term borrowing.

When a Cash-Out Refi is the Best Choice

If you want to lock in a fixed rate, extend your loan term, or access a large sum all at once, a cash-out refinance may be a better option. Taking this route is more appealing when mortgage interest rates are favorable, or if your current loan has a higher rate than what’s available today.

It’s also worth considering a cash-out refi if you plan to stay in your home for several more years. This gives you time to recover any upfront closing costs and benefit from a potentially lower monthly mortgage payment.

HELOC vs. Cash-Out Refinance Pros and Cons

Before you can decide between a HELOC and cash-out refinance, it’s smart to compare the benefits and drawbacks. Here’s what you need to know:

HELOC Pros:

• Flexible borrowing over time
• Interest-only payments during draw period
• Typically lower closing costs
• Pay interest only on what you borrow

HELOC Cons:

• Variable interest rates may increase over time
• Payments may rise significantly during repayment period
• Risk of overspending due to revolving credit access

To learn more about HELOC pros and cons, check out our previous article.

Cash-Out Refi Pros:

• Fixed interest rate on new loan
• Receive a lump sum up front
• May lower your monthly mortgage payment if rates are favorable
• Only one loan to manage instead of two

Cash-Out Refi Cons:

• Higher upfront costs, including closing fees
• Restarting your mortgage term may cost more in interest long-term
• Less flexibility if you need funds gradually

Things to Consider Before Choosing a HELOC or Cash-Out Refinance

As you weigh your options, be sure to ask yourself these questions:

1. How long do I plan to stay in my home?

If you expect to move within a few years, a HELOC may offer more short-term flexibility. Meanwhile, a cash-out refinance would make more sense if you were staying for the long haul.

2. What are the current interest rates?

If mortgage rates have dropped since you first purchased your home, a cash-out refinance could help you lock in a better rate. If rates are higher, however, a HELOC might help you avoid refinancing your entire mortgage.

3. How much equity do I have?

Your ability to qualify for either option depends on how much equity you have built in your home. Most lenders require at least 15-20% equity after the loan or credit line is issued.

4. What are my financial goals?

If you need money gradually—for example, to fund home updates in stages—a HELOC may be more practical. If you are paying off large debts or financing a one-time expense, a lump sum from a cash-out refinance may be more helpful.

HELOC and Cash-Out Refi Eligibility

Before you apply for either a HELOC or a cash-out refinance loan, it’s important to understand the general eligibility requirements. While exact criteria can vary by lender, both options require you to have sufficient equity in your home.

Your credit score also plays a major role. To qualify for a HELOC, many lenders look for a credit score in the mid-600s or higher, along with a reliable income and a manageable debt-to-income ratio.

For a cash-out refinance, you go through a similar approval process as you would with a traditional mortgage, including a home appraisal and underwriting review. If you have owned your home for several years and built equity, refinancing may allow you to access a larger amount up front.

Just remember that both loan types use your home as collateral, so it’s important to borrow responsibly and choose a repayment plan that fits your budget.

Talk to a Lending Expert at Academy Bank

Still deciding between a HELOC and a cash-out refinance? You don’t have to figure it out alone. The experienced lending team at Academy Bank can help you explore your options, answer questions about rates and eligibility, and ensure the path you choose fits your long-term plans.

We also offer digital tools to help you make smarter financial decisions. Use our Home Equity Line of Credit Calculator to you estimate your monthly payments and borrowing limits.

Ready to take the next step? Explore our HELOC¹ and cash-out refinance² options online, connect with our mortgage lending team, or visit a local banking center.