HELOC vs. Cash-Out Refinance: Which Strategy Makes Sense for You?
As a homeowner, your house isn’t just the place you live—it’s one of the most powerful financial tools you have. If you’ve built up equity and want to put it to work (to pay off debt, start a renovation, or just create breathing room in your monthly budget), you have three main options: a Home Equity Line of Credit (HELOC), a Cash-Out Refinance, or a Fixed Second Mortgage Cash-Out.
Each lets you access your equity—but they work very differently. So how do you choose the right one?
Let’s break it down in plain English.
What Is a Cash-Out Refinance?
A cash-out refinance replaces your current mortgage with a brand-new loan. You refinance for a higher loan amount than you currently owe and take the difference out in cash.
Example:
- Home value: $400,000
- Current mortgage balance: $250,000
- New loan: $320,000
- Cash out: $70,000 (before closing costs)
You now have one new mortgage, potentially at a new rate and term, with the equity you pulled out in your bank account.
What Is a HELOC?
A Home Equity Line of Credit is a separate loan that sits behind your current mortgage. It acts like a credit card secured by your home.
You can borrow from it as needed, pay it down, and borrow again during the draw period (usually 10 years). After that, you enter a repayment period (often 10 to 20 years).
- You keep your existing mortgage
- You only pay interest on the amount you use
- It’s revolving, flexible, and usually interest-only for the first 10 years
What Is a Fixed Second Cash-Out?
A Fixed Second Cash-Out loan is a lump-sum second mortgage with a fixed interest rate and fixed monthly payment.
Unlike a HELOC, it’s not revolving credit—it’s a one-time disbursement. And unlike a cash-out refinance, it leaves your existing mortgage untouched.
- You get a lump sum at a fixed rate
- Your current first mortgage remains in place
- You repay the second loan over 10 to 30 years, depending on the program
Pros and Cons: Side-by-Side
| Feature | HELOC | Cash-Out Refi | Fixed Second Cash-Out |
|---|---|---|---|
| Access to Equity | Yes | Yes | Yes |
| Replaces First Mortgage | No | Yes | No |
| Closing Costs | Low to None | Yes | Moderate |
| Fixed Rate Option | Sometimes | Yes | Yes |
| Adjustable Rate Risk | Often | Optional | No |
| Good for Ongoing Projects | Yes | No | No |
| Good for Debt Payoff | Yes | Yes | Yes |
| Affects Mortgage Rate | No | Yes | No |
| Monthly Payment Predictability | Varies | Fixed | Fixed |
What About Texas?
If you’re in Texas, we have unique laws about home equity:
- You can only access up to 80% of your home’s appraised value
- Texas cash-out loans (aka Section 50(a)(6)) have very specific rules, and they stick with the property until refinanced under non-cash-out terms
- HELOCs and Fixed Seconds are also subject to 80% CLTV limits
Bottom line? You want a lender who knows the Texas Constitution as well as they know loan guidelines. (That would be me.)
Which One Is Right for You?
Choose a HELOC if:
- You want flexibility and access to funds over time
- You already have a great rate on your current mortgage
- You only need a small amount of cash or want to borrow in stages
Choose a Cash-Out Refi if:
- You want to lock in a fixed rate for everything
- You want to consolidate multiple debts into one payment
- You prefer having just one mortgage to manage
- You need a large lump sum for a big project
Choose a Fixed Second Cash-Out if:
- You need a lump sum for a specific purpose
- You want a fixed interest rate and predictable monthly payments
- You don’t want to touch your existing first mortgage
Want Help Comparing Options?
I use powerful software through MortgageCoach to create a Total Cost Analysis (TCA) that compares:
- HELOC vs. Refi vs. Fixed Second
- Monthly payments
- Short- and long-term costs
- Total interest paid
- Break-even points
You’ll get a clear picture of what makes the most sense for you—based on your goals, not just the rate.
Want to See Today’s HELOC Rates?
If you’re considering a HELOC, you can apply online to view your options: Check HELOC options here
Tips before you apply:
- Apply in the name of the person with the highest credit score, even if that’s not the highest income
- Use household income, not just your individual income
- If you’re planning to use the funds to pay off debt, list that in your application so it factors into your approval
Have questions? Reach out here and we can run your options together.
