The choice between a cash-out refinance and a HELOC comes down to one question: is your current first-mortgage rate lower than today's 30-year fixed? If yes, a HELOC keeps the low rate on the first mortgage and layers a small second lien on top — usually the cheaper move. If no, a cash-out refinance replaces the whole first mortgage at today's rate and hands you the difference in cash. This guide walks the decision on a $500,000 home with a $200,000 first mortgage at 3.5%, quantifies both paths, and shows why the market-rate comparison usually decides it. Talk to a CPA about deductibility and to your lender about program eligibility before you commit.
Key Takeaways
- A cash-out refinance replaces your first mortgage with a new, larger one at today's rate; a HELOC is a second lien that leaves the first mortgage untouched and prices off prime plus a margin. Comparing total cost of borrowing — draw size, remaining term, closing costs, and rate premium — usually matters more than the headline-rate comparison alone (Freddie Mac PMMS).
- Closing costs differ by roughly an order of magnitude. A cash-out refi typically costs 2–5% of the new loan ($5,400–$13,500 on a $270K balance); a HELOC often runs $0–$500 because many lenders waive appraisal and origination (CFPB HELOC toolkit).
- HELOC rates are variable, cash-out refi rates are fixed. The bank prime rate is published in Federal Reserve H.15; your HELOC rate is prime + a lender-set margin. Cash-out refi rates are anchored to the Freddie Mac PMMS (Fannie Mae Selling Guide B2-1.3-04).
- CLTV caps differ. Fannie Mae limits a conventional cash-out refi to 80% CLTV on an owner-occupied primary residence (B2-1.3-04). HELOCs are portfolio-held, so each lender sets its own cap — 85% is a typical lender norm, with some lenders extending to 90%.
- Interest deductibility is the same for both. Under the Tax Cuts and Jobs Act — originally for tax years 2018–2025 and extended by the 2025 tax package (OBBBA) for tax year 2026 and beyond — home-secured debt interest is deductible only when proceeds buy, build, or substantially improve the home securing the loan (IRS Publication 936).
The one-question decision — is your current rate below today's 30-year fixed?
Start with the rate comparison, then run the math on total cost. If your first-mortgage rate is meaningfully below today's Freddie Mac PMMS 30-year fixed, the HELOC is usually cheaper because a cash-out refi resets the rate on the entire balance — not just the new cash portion. If your rate is at or above today's PMMS, the refi becomes a candidate — but it's not automatic. For a small draw relative to your first-mortgage balance, refi closing costs of 2–5% of the new loan can exceed the HELOC's rate premium over the remaining term; for a large draw on a long remaining term, the refi's lower rate on the whole balance wins. Before you commit, compare total cost of borrowing on both scenarios using your actual draw size, your remaining term, both quoted rates, and both closing-cost estimates. The $500K worked example below shows how to run that math.
How each product sits in your capital stack
A cash-out refinance pays off your existing first mortgage and issues a new, larger first mortgage at today's rate; you walk away with the difference in cash. A HELOC is a second lien — your first mortgage stays as-is, and the HELOC becomes a revolving line drawn against your remaining equity. That structural difference drives every other tradeoff, because a first-lien reset touches your whole balance while a second-lien add-on touches only the new borrowing. Read how a HELOC actually works if the second-lien mechanics are new to you.
Second-lien HELOCs price higher than first-lien mortgages because the HELOC lender gets paid after the first-mortgage lender in foreclosure. That's why HELOC rates are prime + margin rather than PMMS-anchored, and why HELOCs are portfolio-held — Fannie Mae buys first mortgages, not junior liens. When a HELOC sits behind a Fannie-eligible first mortgage, the first-mortgage side must comply with subordinate-financing rules in Fannie Mae Selling Guide B2-1.4-01, but the HELOC's own CLTV, DTI, and FICO thresholds are set by the HELOC lender.
If you want fixed-rate certainty without touching your first mortgage, the fixed-payment home equity loan (HELOAN) is the third option most decision guides skip — a fixed-rate second lien delivered as a lump sum, pricier than a HELOC but without the variable-rate exposure.
Closing costs and rate mechanics compared
Cash-out refi closing costs run 2–5% of the new loan — title insurance, appraisal, origination, recording fees, and prepaid escrow. On a $270,000 balance that's $5,400 to $13,500 out of pocket or rolled into the loan. HELOC closing costs are typically $0–$500 because most lenders waive appraisal (using an automated valuation model) and origination on the line itself — see the CFPB HELOC toolkit for the standard disclosure schedule. Our guide to closing costs on a first-mortgage refinance walks each refi fee in detail.
Cash-out refi rates are fixed and priced off the Freddie Mac PMMS. HELOC rates are variable — prime + margin — with the prime rate published in Federal Reserve H.15 and the margin set by the lender (typically 0.25% to 3.0%). When the Fed moves the federal funds rate, prime moves with it, and your HELOC payment resets the following billing cycle.
Head-to-head comparison table
| Feature | Cash-out refinance | HELOC |
|---|---|---|
| Lien position | Replaces first mortgage | Second lien behind first |
| Rate type | Fixed (15- or 30-year) | Variable (prime + margin) |
| Rate benchmark | Freddie Mac PMMS | Federal Reserve H.15 prime |
| Typical closing costs | 2–5% of new loan | $0–$500 |
| Draw flexibility | Lump sum at closing | Revolving line (draw as needed) |
| Repayment structure | Amortized over 15 or 30 yr | Interest-only draw + 20-yr amortized repayment |
| Typical max CLTV | 80% (Fannie Mae B2-1.3-04) | ~85% (typical lender norm) |
| Best fit | Rate at/above PMMS AND draw large vs. balance | Rate below PMMS OR draw small vs. balance |
The $500K worked example
Setup: a homeowner owns a $500,000 home with a $200,000 first mortgage at 3.5% and 27 years remaining. Current P&I: $955/month. Available equity at 85% CLTV = $500,000 × 0.85 − $200,000 = $225,000. Say they want $70,000 in cash for a kitchen renovation.
Scenario A — Cash-out refinance to $278,100 ($270,000 new principal plus ~3% closing costs of $8,100 rolled into the balance) at today's PMMS-anchored rate of ~6.5%, 30-year fixed:
- New P&I on the $278,100 balance: ~$1,758/month — an increase of ~$803/month over the current $955 payment
- Closing costs at 3%: $8,100 (rolled into the balance, so financed at 6.5% for 30 years)
- First-year interest: ~$18,000
- The homeowner loses the 3.5% rate on the entire $200,000 balance to unlock $70,000 in cash
Scenario B — HELOC for $70,000 at prime + 0.5% (~8.0%), with a 10-year interest-only draw, first mortgage untouched:
- First-mortgage P&I unchanged: $955/month
- HELOC interest-only on the $70,000 draw: $467/month
- Combined: $1,422/month — ~$336/month less than Scenario A
- Closing costs: $0–$500
- First-year interest on the HELOC: ~$5,600; combined first-year interest (first mortgage plus HELOC) ≈ ~$12,600
- The 3.5% rate on the $200,000 first mortgage stays intact
| Line item | Scenario A: cash-out refi | Scenario B: HELOC |
|---|---|---|
| First-mortgage balance | $278,100 @ 6.5% fixed | $200,000 @ 3.5% (untouched) |
| Second lien | None | $70,000 @ ~8.0% variable, interest-only |
| Monthly payment (all housing debt) | $1,758 | $1,422 combined |
| Closing costs | ~$8,100 (financed) | $0–$500 |
| First-year interest (all housing debt) | ~$18,000 | ~$12,600 (≈$7,000 first mortgage + $5,600 HELOC) |
| Rate risk | None (fixed 30-year) | HELOC resets with prime |
Comparing both on the same basis — all housing-debt interest in year one — the HELOC saves roughly $5,400 in first-year interest, ~$336/month in payment, and $7,600–$8,100 in upfront closing costs at the cost of variable-rate exposure on the $70,000 draw. Over the full 30-year horizon, the refi's total interest on $278,100 at 6.5% is roughly $354,700 versus a baseline (keeping the 3.5% first mortgage for its remaining 27 years) of roughly $109,400 plus $56,000 of HELOC interest over its 10-year interest-only draw — a large gap that only closes if HELOC rates spike, the homeowner holds the balance for decades, or the draw is much larger than $70,000. The blended cost of capital matters, not the headline rate. The refi's 6.5% applies to $278,100; the HELOC's 8.0% applies to $70,000 while the 3.5% keeps compounding cheaply on $200,000. That preserved-low-rate math is why the HELOC usually wins whenever your first-mortgage rate is meaningfully below today's PMMS and the draw is small relative to the first-mortgage balance.
When the decision flips — three exception cases
- You need more than 20 years of payment certainty. A cash-out refi's fixed 30-year rate can be worth a small blended-cost premium if variable-rate risk is unacceptable. The CFPB HELOC toolkit explains the payment-shock risk when interest-only payments convert to fully amortized ones at the end of the draw period.
- Your current rate is only slightly below today's. If today's PMMS is 6.5% and your first mortgage is at 6.2%, closing costs decide it. Below a 50–75 basis-point gap, 2–5% closing costs on the new loan can flip the answer.
- You need a very large draw relative to equity. Some HELOC lenders cap the line at $250,000 or $500,000. A homeowner who needs $400,000 in cash may only find a facility that size via a cash-out refi.
Qualifying rules for each
The two products live under different rulebooks, and conflating them is a common error in comparison articles. Cash-out refi standards are set by Fannie Mae Selling Guide B2-1.3-04 for conventional loans. HELOC standards are set by each portfolio lender — Fannie Mae does not buy HELOCs.
Cash-out refi (Fannie Mae B2-1.3-04): Maximum 80% CLTV on an owner-occupied single-family primary residence. Six-month seasoning: you must have owned the home for at least six months before the note date. Standard conforming DTI, credit score, and reserve requirements apply, and the lender will confirm your combined loan-to-value (CLTV) via full appraisal. Ask your lender to run debt-to-income (DTI) thresholds with the new payment before you commit.
HELOC (typical lender norms): Most lenders cap CLTV at 85%, DTI at 43%, and require a FICO of 680+ for the best pricing. Some lenders extend to 90% CLTV for the strongest borrowers; some cap at 80% for weaker credit. Because these are lender-set — not Fannie Mae rules — they vary. Shop at least three lenders and get each rate sheet in writing.
Interest deductibility — same test for both products
Both cash-out refi and HELOC interest are deductible under the same rule: proceeds must be used to buy, build, or substantially improve the home securing the loan (IRS Publication 936). Interest on funds used for debt consolidation, tuition, or a car is not deductible, regardless of which product delivered the money. See our explainer on the mortgage-interest deduction for the underlying rule.
This test was codified by the Tax Cuts and Jobs Act, originally in effect for tax years 2018–2025 and extended by the 2025 tax package (OBBBA) for tax year 2026 and beyond. The $750,000 acquisition-debt cap ($375,000 married filing separately) applies to the combined balance of first mortgage plus home-equity debt used for a qualifying purpose. Run your specific situation past a CPA or enrolled agent before you close — this article covers the mechanics, not your return.
What the paperwork feels like
A cash-out refinance closes like a purchase mortgage: full appraisal, title work, a 30- to 45-day timeline, prepaid escrow reserves, a new note and deed of trust. The old first mortgage gets paid off from the new proceeds. A HELOC closes closer to a credit-card application: often an automated valuation instead of full appraisal, a 2- to 4-week timeline, a shorter packet. HELOCs and cash-out refis on primary residences both carry a three-day right of rescission under Regulation Z — three business days to walk away for any reason.
The bottom line — compare total costs, not headline rates
If your first-mortgage rate is below today's Freddie Mac PMMS 30-year fixed, the HELOC is the usual answer — keeping the low first-mortgage rate on a large balance is worth more than the higher HELOC headline rate on a smaller draw.
If your first-mortgage rate is at or above today's PMMS, a cash-out refinance becomes a candidate — but not automatically. Run both quotes side by side and compare total cost of borrowing over your intended holding period: refi closing costs plus interest on the new full balance versus HELOC closing costs plus interest on the draw. For a small draw or short remaining term, HELOC closing costs of $0–$500 can beat 2–5% refi closing costs even when the HELOC rate is higher.
Everything else refines the decision inside that comparison. Bring your current rate, target cash amount, remaining term, and both closing-cost estimates to a lender and ask for both products side by side. If a lender pushes one without walking the total-cost math, get a second quote.
Disclosure
This material is provided for informational purposes only and is not tax, legal, or lending advice. Program terms, rates, closing costs, and qualifying rules vary by lender, state, and borrower profile. Consult a CPA or enrolled agent for questions about deductibility of interest, and consult a licensed loan officer for questions about program eligibility and current pricing. Opendoor Home Loans LLC is not available in all markets; products, programs, rates, and terms are subject to change without notice.
