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Building equity on your home is one of the big perks of owning property. When you need extra cash for a kitchen remodel or college tuition, that equity becomes a lifeline.
Cash-out refinances and home equity lines of credit (HELOCs) are two of the most common ways to tap into your equity, but they follow different playbooks. A cash-out refinance replaces your mortgage and gives you a lump sum of cash, whereas HELOCs offer flexible access to your funds.
Each approach has distinct benefits, but figuring which option is the best for you and your goals can be difficult. Thankfully, you can get pre-approved in as little as three minutes with Better, and you’ll see your options laid out so you — along with your loan consultant — can work together to figure out which option is best for you. But before you hit “Apply,” let’s explore how cash-out refinances vs. HELOCs work and investigate their use cases so you can make an informed decision.
What is a cash-out refinance?
A cash-out refinance (or refi) swaps your current mortgage loan for a bigger one, letting you pocket the difference between the new and original loans — often up to 80% of your home’s equity.
Common uses include:
— Major renovations
— Paying off high-interest debt
— College tuition
— Emergency savings
Example:
If your home is worth $400,000 and you owe $200,000, you might refinance for $250,000. You’d use $200K to pay off your old loan, and walk away with $50K in cash (minus closing costs, which can often be rolled in). You end up with a brand-new mortgage (hopefully with with a better interest rate).
What is a HELOC?
Instead of replacing your existing mortgage, a HELOC is a second mortgage that creates a line of credit secured by your home. Lenders will often let you borrow a little more of your home’s value than with a cash-out refinance — often up to 85% minus what you still owe on your mortgage.
Rather than getting a lump sum, HELOCs function more like a credit card, or a revolving line of credit. You get approved for a credit limit based on your home’s equity and other factors, like your credit score. You can borrow, repay, and borrow again as much as you want during the “draw period” — typically 5–10 years.
The flexibility of a HELOC makes it well-suited for expenses with uncertain final costs, such as ongoing renovation projects.
If you’re interested in taking out a HELOC, you can borrow up to 90% of your home’s equity, up to $500,000¹ with Better and get the funds in your bank account in as little as seven days.²
Pros and cons of cash-out refinances and HELOCs
Still wondering if you should refinance or get a HELOC? Here are the pros and cons of a HELOC vs. a refinance to help you decide.
Cash-out refinance pros and cons
The advantages of a cash-out refinance include:
— You get a fixed rate, so your monthly payments will be more stable than variable-rate HELOCs.
— Interest rates are usually lower than for personal loans or credit cards because the loan is secured by your home.
— If you qualify, you can replace your mortgage with a loan with a lower interest rate.
— Like a home equity loan, you can access a larger amount of money at once for big expenses.
— A cash-out refinance is a first mortgage, so you have only one loan instead of two, like with a HELOC.
The primary drawbacks are:
— A refinance can come with higher closing costs.
— Restarting your mortgage term may lead you to pay more interest over time.
— If you borrow more than you need, you still have to pay interest on all of it.
— Missing payments can lead to foreclosure and losing your home.
HELOC pros and cons
HELOCs have some serious benefits, such as:
— Your original mortgage stays intact, which is preferable if you already have a good interest rate.
— You only pay interest on the amount you use.
— You can draw funds as many times as you need without reapplying.
— During the draw period, you may only need to make interest payments.
— Closing costs are typically cheaper than cash-out refinances — and can be rolled into the loan so there are no upfront costs
Things to watch out for include:
— Variable interest rates mean your monthly payments could increase if market rates rise.
— You have two loans to manage: your original mortgage plus the HELOC. They have separate monthly payments, interest rates, and loan terms.
— During the drawing period, you’re only required to pay back interest. However, once the draw period ends, you must start paying both interest and principal.
— Like a cash-out refinance, failure to pay could result in foreclosure.
Cash-out refinances vs. HELOCs
If you’re weighing options to access home equity, it helps to compare cash-out refinances and HELOCs side by side.
Similarities
Cash-out refinances and HELOCs work differently, but they have a lot in common. Both tap into your home’s equity — the amount of your home you actually own — and turn it into cash you can use. Your lender will have a similar application checklist for both options: You need adequate equity (usually at least 15–20% left after borrowing), a solid credit score, and income to cover the monthly payments.
Both types of mortgages use your home as collateral, which nets you lower rates than credit cards or personal loans. However, it also means your home is on the line if you can’t pay.
Depending on how you use the money, either option might get you tax breaks on the interest, but you’ll want to check with a tax pro first.
Differences
We’ve covered some of the fundamental differences already, namely:
— A cash-out refinance replaces your existing mortgage, whereas a HELOC adds a second mortgage.
— Cash-out refinances typically offer fixed rates, and HELOCs usually have variable rates.
— A cash-out refinance gives you a lump sum upfront, while a HELOC allows flexible draws over time.
— Cash-out refinances reset your mortgage term. In contrast, a HELOC keeps your original mortgage intact.
Timing is another crucial factor. Cash-out refinances often take longer to process — sometimes weeks or even months. HELOCs move faster, especially with Better, where you could see money in your account within seven days.
Here’s a breakdown of the main differences:
| Feature | Cash-out Refinance | HELOC |
|---|---|---|
| Mortgage structure | Replaces original mortgage | Adds a second mortgage |
| Payment type | Fixed interest rate | Usually variable |
| Access to funds | Lump sum at closing | Draw as needed |
| Loan structure | One loan | Two separate loans |
| Reuse funds | No | Yes, during draw period |
| Refi term impact | Resets term | Original mortgage stays intact |
| Timeline | Often 30–60 days | 7 days (with Better) |
Choosing between a cash-out refinance and a HELOC
So, is it better to get a HELOC or a refinance? It all comes down to your financial situation. If you have a great rate on your current mortgage, a HELOC might make more sense because you won’t have to refinance your entire loan. This is especially true if rates have gone up since you got your mortgage.
How you plan to use your funds is a significant consideration in any home equity line of credit vs. refinancing discussion. Need a lump sum for a one-time expense, like paying off all your credit cards? A cash-out refinance might be your best bet. But if you’re facing ongoing or uncertain expenses, like a major home improvement project, a HELOC gives you more flexibility to borrow only what you need, whenever you need it.
Your timeline is also important. Cash-out refinances typically take 30–60 days to process, while HELOCs can take just two to six weeks. If you need funds quickly, Better HELOCs can get you access to cash in just seven days.
Try using our HELOC vs. refinance calculator to crunch some numbers and learn how your estimated payment, interest rate, and savings might stack up between each option.
Access your equity the Better way
Access your equity the Better way
Both cash-out refinances and HELOCs put your home’s equity to work when you need it. Cash-out refinances offer the stability of fixed rates and a single monthly payment, whereas HELOCs provide flexibility and often come with lower upfront costs. Your financial situation and needs will determine whether a HELOC is better than a refinance for your particular situation.
Ready to tap into your home’s equity? Better helps you explore both cash-out refinances and HELOCs. Our streamlined application process lets you apply 100% online and get approved in as little as three minutes.
The best part? We built technology that will do the legwork for you. All you have to do is answer a few questions about you and your property, and you’ll get a comprehensive breakdown of Cash-out vs. HELOC cash options and an expert personalized recommendation from Better Mortgage.
Get the ability to confidently borrow against your home knowing your options.
¹ $50,000–$500,000 loan amount at up to 90% of your property’s value. Maximum LTV dependent on borrower eligibility.
² Assumes eligibility for Automated Valuation Model (AVM), loan amount <$400K, required documents uploaded within 24 hours, notary availability, and earliest close date scheduled. Times may vary if appraisal is required.