HELOC vs Cash-Out Refinance: Which Is Better in 2026?

You need $50,000. Your home has the equity. But should you cash-out refinance or open a HELOC?

If you locked in a mortgage rate between 2020 and 2022, you're sitting on something valuable. We're talking 2.5% to 4% rates that may never come back. And that changes everything about this decision.

Here's the uncomfortable truth most financial websites won't say directly: if you have a low mortgage rate, don't give it up. A cash-out refinance forces you to trade your 3% rate for today's 7% rate. A HELOC lets you keep it.

Let's break down exactly when each option makes sense—and when one is clearly the wrong choice.

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The 30-Second Difference

The short version: A cash-out refi replaces your mortgage. A HELOC sits alongside it. For most homeowners in 2026, that distinction is worth six figures.

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What Is Cash-Out Refinancing?

Cash-out refinancing means replacing your existing mortgage with a new, larger one. You pocket the difference as cash.

Here's what actually happens:

1. Your old mortgage disappears completely
2. You take out a brand-new loan for more than you owe
3. The lender pays off your old balance
4. You receive the extra amount as cash
5. You now have a new rate, new term, and new payment

The key word is replace. You're not borrowing against your equity—you're rebuilding your entire mortgage from scratch. Every dollar of your old balance gets a new interest rate.

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What Is a HELOC?

A HELOC (Home Equity Line of Credit) is a separate loan that uses your equity as collateral. Your first mortgage doesn't change.

Think of it like a credit card backed by your house:

• You get a credit limit based on your equity
• You draw money as needed during the "draw period" (usually 10 years)
• You only pay interest on what you borrow
• You can pay it down and reborrow

The crucial difference: your original mortgage rate stays locked. You're only paying new rates on the new money.

For a deeper dive, see our complete guide: What is a HELOC?

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The Math That Changes Everything

Let's stop being abstract. Here's what cash-out refinancing actually costs when you have a low mortgage rate.

Your situation:

• Current mortgage balance: $400,000
• Current rate: 3.25% (locked in 2021)
• Current payment: $1,740/month
• You need: $50,000 in cash

Option A: Cash-Out Refinance

New loan: $450,000 at 7.0% (today's rate)

New payment: $2,993/month

That's $1,253 more per month than you're paying now.

Option B: HELOC

Your mortgage stays at: $400,000 at 3.25% = $1,740/month

HELOC: $50,000 at 8.5% variable = ~$354/month (interest-only during draw period)

Total payment: $2,094/month

Monthly savings with HELOC: $899

Savings over 10 years: $107,880

Read that again. By keeping your low mortgage rate and using a HELOC instead, you save over $100,000.

The cash-out refinance isn't just more expensive—it's dramatically more expensive. You're paying a higher rate on $400,000 you already borrowed at a better rate.

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HELOC vs Refinance Closing Costs

Beyond monthly payments, closing costs widen the gap further.

Cash-out refinance closing costs:

• Typically 2–5% of the loan amount
• On a $450,000 refi: $9,000–$22,500
• Includes appraisal, origination fees, title insurance, and more
• Often rolled into the loan (meaning you pay interest on them too)

HELOC closing costs:

• Often $0–$2,000
• Many lenders cover closing costs entirely
• Some charge a small annual fee ($50–$100)
• No cost to have the line available—only pay when you use it

Even before you make a single payment, the cash-out refi costs you $7,000–$20,000 more upfront.

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When Cash-Out Refinancing Actually Makes Sense

Let's be fair. There are real scenarios where cash-out refinancing is the better choice:

1. Your current rate is higher than today's rates

If you bought recently at 7.5% or still have an older mortgage from the 1990s at 8%, refinancing to 7% could make sense. You'd lower your rate AND get cash. (This is increasingly rare in 2026.)

2. You want to escape an adjustable rate

If you have an ARM that's about to adjust higher, locking in a fixed rate through a cash-out refi provides payment certainty.

3. You need a very large amount

HELOCs typically max out at 80–85% combined loan-to-value. If you need more equity than that, a cash-out refi might be your only option.

4. You strongly prefer one fixed payment

Some people value simplicity over savings. One mortgage, one payment, one fixed rate—no variable rate anxiety. That peace of mind has value, even if it costs more.

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When a HELOC Is the Clear Winner

For most homeowners in 2026, the HELOC wins decisively:

1. You locked in a low mortgage rate

This is the big one. If your rate is under 5%, giving it up for today's rates is expensive. A HELOC lets you keep your low-rate mortgage untouched.

2. You don't need all the money at once

Renovating your kitchen? You might need $10K now for demolition, $15K next month for cabinets, $5K later for appliances. A HELOC lets you draw as needed. Cash-out refi gives you everything at once (and you pay interest on the full amount immediately).

3. You want lower closing costs

HELOCs often have minimal or zero closing costs. Cash-out refis can cost $10K+.

4. You want flexibility

HELOC draw periods let you pay down the balance and reborrow. It's revolving credit. A cash-out refi is a one-time lump sum.

5. You might sell within 5–10 years

A HELOC is easier to pay off at sale. You're not locked into a 30-year commitment you might exit early.

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But What About Variable Rates?

This is the most common objection to HELOCs: "Isn't a variable rate risky?"

Let's put this in perspective.

Cash-out refi: Fixed rate, but applied to your entire mortgage balance (potentially $400K+)

HELOC: Variable rate, but only on what you borrow (typically $50K–$100K)

Here's the math that matters: Even if HELOC rates rise significantly, you're paying that variable rate on a much smaller balance. The savings from keeping your low first mortgage rate usually dwarf any HELOC rate increases.

Example:

• HELOC rate rises from 8.5% to 10.5% on $50K = ~$83/month increase
• Cash-out refi rate is fixed at 7%—but on $400K you already had at 3.25%

That $83/month HELOC rate increase still leaves you way ahead of the cash-out refi scenario.

Pro tip: Many lenders offer fixed-rate HELOCs or let you lock portions of your balance. If rate volatility keeps you up at night, ask about these options.

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Using Home Equity for a Down Payment

Here's a scenario we hear often: "I want to buy a new home before selling my current one. Can I use equity for the down payment?"

Yes—and here's where HELOCs shine.

The HELOC approach:

1. Open a HELOC while you still live in your current home
2. Use HELOC funds for the down payment on your new home
3. Move into the new home
4. Sell your old home
5. Pay off the HELOC with the sale proceeds

This is called bridge financing. You're "bridging" the gap between buying and selling.

Why cash-out refi doesn't work as well:

• You're now locked into a higher rate on your old home
• If it takes months to sell, you're paying $1,000+/month extra
• More complex to unwind at closing
• Higher upfront costs eat into your proceeds

The HELOC keeps your options open. The cash-out refi commits you to an expensive path.

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Complete Comparison

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Quick Decision Checklist

Choose a HELOC if:

• ☑️ Your current mortgage rate is below 5%
• ☑️ You don't need all the money at once
• ☑️ You want lower closing costs
• ☑️ You might pay it off early
• ☑️ You value flexibility
• ☑️ You might sell within 10 years

Choose a cash-out refinance if:

• ☑️ Your current rate is higher than today's rates
• ☑️ You want one fixed payment forever
• ☑️ You need a very large amount (>80% of equity)
• ☑️ You prefer certainty over flexibility
• ☑️ You plan to stay in the home 20+ years

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Ready to Keep Your Low Rate?

If you locked in a great mortgage rate, you've already won part of the financial game. Don't give that up.

A HELOC lets you tap your equity while keeping your low-rate mortgage exactly where it is. At HonestCasa, we match you with 200+ lenders to find the best HELOC for your situation.

Check your eligibility in 2 minutes — soft credit pull, no impact to your score.

Check My Eligibility →

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Frequently Asked Questions

Can I have both a HELOC and a cash-out refinance?

Technically yes, but it rarely makes sense. If you cash-out refinance, you're replacing your mortgage anyway—the whole point of a HELOC is to keep your mortgage intact. Most people choose one strategy or the other.

What if I already have a HELOC and want to refinance?

You'll need to pay off the HELOC balance at closing, or the new lender may require subordination (where the HELOC moves behind the new first mortgage). Factor this into your cost calculations.

Is HELOC interest tax deductible?

Interest on home equity debt may be tax deductible if you use the funds to "buy, build, or substantially improve" the home securing the loan. Using a HELOC for debt consolidation or other purposes typically isn't deductible. Consult a tax professional for your specific situation.

Can I use cash-out refinance to pay off a HELOC?

Yes, but in 2026's rate environment, this usually costs more long-term. You'd be trading HELOC interest on a small balance for higher mortgage interest on your entire balance. Run the numbers carefully before assuming consolidation saves money.

What's faster—HELOC or cash-out refinance?

HELOCs are typically much faster. Many lenders close in 7–21 days. Cash-out refinances take 30–45 days on average because you're going through a full mortgage underwriting process.

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Related reading:

• What is a HELOC? Complete Guide
• HELOC vs Home Equity Loan
• HELOC Requirements: What You Need to Qualify