How do a HELOC and a cash-out refinance work?
A cash-out refinance replaces your current mortgage with a new, larger loan, and you receive the difference at closing. You end up with one mortgage and one payment.
A home equity line of credit (HELOC) is a second loan that sits behind your current mortgage. You draw from it as needed, up to a limit, and keep your first mortgage as it is. A home equity loan is similar but pays out one lump sum with a set payment.
Side by side
| Cash-out refinance | HELOC | |
|---|---|---|
| Your current mortgage | Paid off and replaced | Stays in place |
| How you get the money | One lump sum at closing | Draw what you need, when you need it |
| Payments | One mortgage payment | A second payment, often with a variable rate |
| Upfront costs | Closing costs similar to a mortgage | Often lower, depending on the lender |
| Often fits when | Today's options compare well with your current loan, or you want one payment | You want to keep your current mortgage, or your costs come in stages |
How do HELOC payments change over time?
A HELOC has two stages. During the draw period, which could last 10 years, you can borrow up to your limit, and minimum payments are often based on your current balance. When it ends you enter the repayment period, often 10 or 20 years, and can no longer borrow. The CFPB notes that monthly payments are often significantly higher once repayment starts.
Most HELOCs have a variable rate, so the payment can change from month to month. Some let you convert part of the balance to a fixed rate, which is usually higher but more predictable.
Can I cancel after I sign?
Most refinances and home equity loans that aren't used to buy the home come with a federal right to cancel. You have three business days after you sign, receive your Truth in Lending disclosure and receive two copies of the cancellation notice. Saturdays count as business days; Sundays and federal holidays don't. That's why the money from a cash-out refinance or a new HELOC usually isn't released until a few days after you sign.
What can I use home equity for?
- Renovations and repairs
- Paying off higher-interest debt
- Funding a down payment on a rental or your next investment. See self-employed and investor loans.
- Tuition or other large costs
How do I choose between them?
- How does a new rate compare with the one on my current mortgage?
- Do I need all the money now, or over time?
- What will the closing costs be, and how long until the savings or the project pays off?
- How would my payment change if a variable rate rises?
Both options are secured by your home, so your home could be at risk if you can't repay. Tom can lay out both side by side with your real numbers.
Tools for this topic: Refinance break-even
Sources
Checked October 2026. Limits and program rules change, so confirm current figures before you rely on them.
General information only, not tax or legal advice. Program availability, eligibility and terms vary by lender and are subject to change and to underwriting approval. Not a commitment to lend.