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

When you need to tap into your home equity, you face a critical decision: should you open a home equity line of credit (HELOC) or do a cash-out refinance? In 2026, this choice matters more than ever as interest rates remain elevated and homeowners who locked in low rates during 2020-2021 are hesitant to refinance.

This guide breaks down both options with real numbers, current market conditions, and scenarios where each makes sense.

What's the Fundamental Difference?

HELOC is a second mortgage that acts like a credit card secured by your home. You get a credit line (typically up to 85% of your home's value minus what you owe), draw what you need, and pay interest only on what you use.

Cash-out refinance replaces your existing mortgage with a new, larger one. You pocket the difference in cash. Your original mortgage disappears, and you start fresh with new terms.

The 2026 Rate Reality

Here's why this decision is particularly challenging in 2026:

Many homeowners secured mortgages at 3-4% between 2020-2021. Current mortgage rates in early 2026 hover around 6.5-7.5%. HELOC rates typically run 1-3 percentage points higher than first mortgage rates, landing most borrowers in the 8-11% range.

This creates an unusual situation: HELOCs cost more per dollar borrowed, but cash-out refinancing could nearly double your rate on your existing loan balance.

The Math That Matters

Let's run real scenarios:

Scenario 1: You locked in a 3.25% mortgage in 2020

• Current mortgage balance: $300,000
• Home value: $450,000
• Need: $50,000 for renovations

Option A: HELOC at 9% APR

• Keep existing $300,000 mortgage at 3.25%
• Borrow $50,000 via HELOC at 9%
• Monthly payment on HELOC (interest-only): ~$375
• Total interest cost over 10 years: ~$45,000
• Keep your low 3.25% rate on $300,000

Option B: Cash-out refinance at 7% APR

• New mortgage: $350,000 at 7%
• Monthly payment: ~$2,329 (vs. ~$1,306 on old mortgage)
• Additional monthly cost: ~$1,023
• You've refinanced $300,000 from 3.25% to 7%

The winner? HELOC by a landslide. Even though the HELOC rate is higher, you're only paying it on $50,000. Refinancing $300,000 from 3.25% to 7% costs you roughly $137,000 in additional interest over the life of the loan.

Scenario 2: You have a 6.5% mortgage from 2023

Same situation, but your existing rate is 6.5%.

Option A: HELOC at 9%

• $50,000 at 9% = $375/month interest-only
• Keep $300,000 at 6.5%

Option B: Cash-out refinance at 7%

• $350,000 at 7%
• You've actually improved from 6.5% to 7% overall (slight increase)
• Monthly payment: ~$2,329
• Old payment at 6.5% on $300,000: ~$1,896
• Difference: ~$433/month
• Effective rate on the $50,000 cash-out: ~10.4%

The winner? Still HELOC, but it's closer. The cash-out refinance isn't as painful here, but you're still paying slightly more and resetting your loan term.

Scenario 3: You have a 7.5% mortgage from 2024

Option A: HELOC at 9%

• Same as above

Option B: Cash-out refinance at 7%

• $350,000 at 7%
• You've lowered your overall rate from 7.5% to 7%
• This is a rate-and-term improvement plus cash-out

The winner? Cash-out refinance. You're lowering your rate on the existing balance and getting cash at a better rate than the HELOC.

Beyond the Rate: Other Critical Factors

Closing Costs

HELOCs: Minimal to zero closing costs in 2026. Many lenders waive fees entirely or charge $500-1,000. You can get approved and funded in 2-3 weeks.

Cash-out refinance: Expect 2-5% of the loan amount. On a $350,000 refinance, that's $7,000-17,500. These include appraisal ($500-800), title insurance ($1,000-2,500), origination fees (0.5-1%), and various administrative costs.

Flexibility

HELOCs: Draw what you need, when you need it. Planning a kitchen renovation over 6 months? Only pay interest on funds as you use them. Planning multiple projects? Keep the line open for future needs.

Cash-out refinance: You get a lump sum immediately. If you only need $30,000 but take $50,000, you're paying interest on $50,000 from day one.

Tax Deductibility

Both HELOC and cash-out refinance interest can be tax-deductible if you use the funds to buy, build, or substantially improve your home. The 2026 limit is interest on up to $750,000 of combined mortgage debt ($375,000 if married filing separately).

Key point: If you use either option for debt consolidation, education, or other purposes, the interest is not deductible.

Payment Structure

HELOCs: Most have two phases:

1. Draw period (typically 10 years): Pay interest-only, draw as needed
2. Repayment period (10-20 years): Pay principal + interest

Your payment can jump significantly when you enter repayment. A $50,000 balance at 9% goes from $375/month (interest-only) to $633/month (15-year repayment).

Cash-out refinance: Fixed payment for 15 or 30 years. Predictable, stable, no surprises.

Variable vs. Fixed Rates

HELOCs: Almost always variable rates tied to the Prime Rate. In 2026, if the Fed cuts rates, your HELOC rate drops. If they raise rates, your payment increases. Some lenders offer fixed-rate conversion options after you draw.

Cash-out refinance: Fixed rate locked for the life of the loan. You know exactly what you'll pay for 15-30 years.

When HELOC Wins

Choose a HELOC if:

1. Your existing mortgage rate is below 5.5% — Don't give up a great rate
2. You need flexibility — Draw $20k now, maybe $15k more in 6 months
3. You expect rates to fall — Variable HELOC rates will drop with Fed cuts
4. You want to minimize upfront costs — Closing costs are minimal
5. You can handle payment variability — Your budget tolerates rate fluctuations
6. You have strong income and discipline — Interest-only payments require you to make principal payments voluntarily or face payment shock later

When Cash-Out Refinance Wins

Choose cash-out refinancing if:

1. Your existing mortgage rate is above 7% — You might actually lower your rate
2. You need a large, one-time lump sum — $75,000+ for a specific project
3. You want payment stability — Fixed payment for 30 years
4. You're already considering refinancing — Combining rate improvement with cash-out
5. You value predictability over flexibility — You know exactly what you need
6. You plan to stay in the home long-term — Amortizing closing costs over many years

The Hybrid Strategy

Smart homeowners in 2026 are using both:

1. Keep your low-rate mortgage with a cash-out refinance for large, immediate needs if your rate is high
2. Open a HELOC as a backup for emergencies or future opportunities
3. Use the HELOC first for smaller amounts, keep the refinance option for true rate improvement scenarios

Many lenders allow you to have both simultaneously. A $25,000 HELOC as an emergency fund costs you nothing if unused, while having $25,000 from a cash-out refinance costs interest from day one.

Lender Options in 2026

Best for HELOCs:

• Figure: Fast online approval, rates from 8.40%, no closing costs
• Spring EQ: Up to 90% CLTV, interest-only options
• Connexus Credit Union: Competitive rates for members, no annual fees

Best for Cash-Out Refinance:

• Better.com: Low fees, fast digital process
• Rocket Mortgage: Streamlined for existing customers
• LoanDepot: Competitive rates for larger loan amounts

Market Timing Considerations

The Federal Reserve's stance in 2026 matters:

If rate cuts are expected: HELOCs become more attractive. Your variable rate will drop as the Fed lowers the Prime Rate.

If rates are stable or rising: Fixed-rate cash-out refinancing locks in certainty.

Most economists predict modest rate cuts in late 2026, making HELOCs potentially cheaper later in the year.

The Bottom Line

For most homeowners with sub-5% mortgages from 2020-2021, HELOCs are the clear winner in 2026. The math is simply too compelling—paying 9% on $50,000 beats refinancing $300,000 from 3.5% to 7%.

If your existing rate is above 7%, cash-out refinancing deserves serious consideration, especially if you can lower your overall rate while extracting equity.

Run your own numbers, consider your risk tolerance, and remember: the best choice isn't about which product is "better"—it's about which fits your specific situation in 2026's unique rate environment.

The homeowners who win are those who do the math, understand the trade-offs, and choose based on their actual mortgage rate, not generic advice.