Home Equity Line of Credit vs. Home Equity Loan vs. Cash-Out Refinance

A home equity line of credit (HELOC), home equity loan, and cash-out refinance can all turn home equity into cash. They do it with very different loan structures.

The home equity borrowing comparison calculator shows the monthly payment, modeled interest and fees, remaining home-secured debt, and the added financing cost over a period you choose.

Do not compare only the rate on the new money. A cash-out refinance replaces the existing first mortgage. A home equity loan or HELOC generally leaves that first mortgage in place and adds a second home-secured debt.

The quick answer

The Consumer Financial Protection Bureau (CFPB) describes a home equity loan as a lump-sum loan against home equity and a HELOC as an open-end line of credit that can generally be drawn, repaid, and drawn again during its borrowing period.

If you already have a mortgage, both are commonly second mortgages. You continue paying the first mortgage while also paying the new home-secured debt.

A cash-out refinance works differently. It pays off and replaces the existing first mortgage with a larger new first mortgage, with the difference providing cash to the borrower.

How the three options work

Home equity line of credit

A HELOC provides a credit limit rather than one required lump-sum loan amount. CFPB notes that borrowers can generally draw repeatedly during the draw period, subject to the account terms and available credit.

HELOC rates are usually variable. Minimum-payment rules also vary, and payments can rise substantially when the draw period ends and repayment begins.

Home equity loan

A home equity loan provides the borrowed amount as a lump sum. CFPB says these loans usually have a fixed interest rate, although products can vary.

When a first mortgage already exists, the home equity loan normally creates a second monthly payment rather than changing the first mortgage.

Cash-out refinance

A cash-out refinance creates a new first mortgage larger than the amount needed to pay off the existing first mortgage. Freddie Mac describes the difference as cash returned from the home's equity.

The new mortgage has its own rate, term, and closing costs. That new rate applies to the entire refinanced balance, not just the extra cash received.

Why your existing mortgage rate matters

Suppose a homeowner owes $250,000 on a fixed mortgage at 3.50% and wants another $75,000.

A $75,000 home equity loan or HELOC leaves the $250,000 first mortgage at 3.50% in place. A $325,000 cash-out refinance replaces it, so the new refinance rate applies to the old $250,000 balance as well as the additional $75,000.

This is why comparing “7.25% home equity loan” with “6.50% cash-out refinance” can be misleading. The 6.50% rate may look lower, while also repricing a much larger balance that had been costing 3.50%.

CFPB specifically warns borrowers comparing HELOCs with cash-out refinancing to consider the interest rate on the existing mortgage because a cash-out refinance may be more or less expensive depending on the terms.

Monthly payment is not the same as financing cost

A payment can be lower because principal is being repaid more slowly, the term is longer, or a HELOC requires only interest during the draw period.

The Sunset Guardian calculator therefore shows several measures together:

Modeled monthly home-secured payment
Interest and upfront costs over the selected period
Added financing cost compared with keeping the first mortgage
Home-secured debt still owed at the end of the period

Principal repayment is not treated as a financing cost. It reduces debt. Interest and fees are costs of financing, while the remaining balance shows how much debt is still attached to the home.

HELOC rate and draw-period risk

CFPB says HELOCs usually have variable interest rates, so payments can change as the rate changes. Some plans allow or require low payments during the draw period, while repayment can become much larger afterward.

The calculator uses a simplified structure:

The entire entered cash amount is drawn immediately.
The entered HELOC rate stays constant.
Draw-period payments are interest only.
The remaining balance amortizes over the entered repayment period.

That makes the three structures comparable without pretending to forecast future variable rates. Replace the assumed HELOC rate with higher and lower scenarios to see how sensitive the result is.

CFPB also notes that a lender may reduce or freeze additional HELOC borrowing in some circumstances, including a significant decline in home value or changes affecting the lender's view of repayment ability.

Home equity loan structure

A home equity loan can be easier to model when a specific amount is needed at one time. The calculator assumes a fixed-rate amortizing loan with equal monthly principal-and- interest payments.

The first mortgage remains unchanged in the model. The new home equity loan payment is added to the existing mortgage payment.

CFPB cautions that home equity loans can include upfront fees and costs, so comparing only the monthly payment can overlook part of the borrowing expense.

Cash-out refinance structure

A cash-out refinance can combine the existing mortgage and new borrowing into one loan and one monthly principal-and- interest payment.

Freddie Mac notes that the borrower receives equity in cash while taking a new mortgage with a new rate and term. Closing costs also apply, and some programs allow costs to be rolled into the loan.

The calculator keeps the comparison simpler by treating entered cash-out refinance costs as paid upfront rather than financing them. If a lender quote finances costs into the loan, compare the quoted new principal directly with the model before relying on the result.

A complete example

The calculator defaults illustrate why the existing mortgage rate can dominate the comparison:

Current mortgage: $250,000 at 3.50%, 22 years remaining
Cash needed: $75,000
Comparison period: 7 years
Home equity loan: 7.25% for 15 years, $1,500 upfront costs
HELOC: assumed 8.00%, 10-year draw, 20-year repayment, $500 upfront costs
Cash-out refinance: 6.50% for 30 years, $7,500 upfront costs

The existing first mortgage has a modeled principal-and- interest payment of about $1,359.20.

Adding the home equity loan produces a combined modeled payment of about $2,043.85. Its additional interest and upfront costs over seven years are about $33,772.

The modeled HELOC draw-period payment is $500, producing a combined initial home-secured payment of about $1,859.20. With the rate held at 8.00% and interest-only payments during the draw period, its additional interest and upfront costs over seven years are about $42,500.

The cash-out refinance produces a modeled payment of about $2,054.22. Even though its 6.50% rate is below the other two new borrowing rates, repricing the existing $250,000 mortgage raises the modeled added financing cost over seven years to about $94,606 under these assumptions.

This example does not establish a generally better option. Change the existing mortgage rate, new rates, terms, fees, cash amount, and comparison period. A homeowner whose current first mortgage has a high rate can get a very different result.

Loan-to-value and available equity

The calculator also shows loan-to-value ratio (LTV) for the existing first mortgage and combined loan-to-value ratio (CLTV) after adding a second lien.

For a cash-out refinance, the new first-mortgage balance is compared directly with the entered home value. The calculator does not determine whether a lender will approve that ratio. Product, property, occupancy, credit, income, and lender requirements vary.

Use the Loan-to-Value Calculator when you want a more detailed equity calculation.

Fees and disclosures

CFPB says HELOCs can include application, origination, appraisal, title, annual, cancellation, inactivity, and conversion fees depending on the plan.

Home equity loans and cash-out refinances can also have closing costs. Use actual lender disclosures when available rather than relying on a generic percentage.

The calculator intentionally accepts dollar costs for each option instead of assuming every lender charges the same percentage.

Your home secures all three options

A home equity loan, HELOC, and cash-out refinance all use the home as collateral. CFPB warns that falling behind on home-secured borrowing can put the home at risk.

Borrowing against equity also reduces the ownership cushion available if the home must be sold or if values fall. Monthly affordability, emergency reserves, and the purpose of the borrowing belong in the decision along with the rate.

Frequently asked questions

Is a HELOC a second mortgage?

When another mortgage already has first-lien priority, a HELOC is commonly a second mortgage or junior lien. The same is generally true of a home equity loan added behind an existing first mortgage.

Does a cash-out refinance keep my old mortgage rate?

No. A cash-out refinance replaces the existing mortgage with a new mortgage. The new loan has its own rate and terms.

Why can a lower cash-out refinance rate still cost more?

Because that rate applies to the entire new mortgage balance. If the old mortgage has a much lower rate, replacing it can increase interest on the existing balance even when the new rate is lower than the rate offered on a HELOC or home equity loan.

Why does the calculator model a HELOC as interest only during the draw period?

It provides a consistent comparison for a common HELOC structure. Actual minimum-payment rules vary. Use the lender's disclosures to replace the calculator assumptions when evaluating a real offer.

Can a HELOC affect a later refinance?

Yes. CFPB notes that a HELOC lender may need to approve its lien remaining subordinate when the first mortgage is refinanced. In some cases the HELOC may need to be paid off before refinancing can proceed.

Sources and further reading

Compare what happens to the mortgage you already have, not just the rate attached to the new cash. The structure of the borrowing can matter as much as the advertised rate.