HELOC vs. Cash-Out Refinance: The Rate Decision
If you locked in a low mortgage rate in 2020-2021 (under 4%), doing a cash-out refinance at today's higher rates could cost you thousands. A HELOC lets you access equity while keeping your low first mortgage rate intact.
Cash-Out Refinance
How it works: Replace your existing mortgage with a new, larger loan. The difference is paid to you in cash.
Pros:
- Single fixed-rate loan
- Predictable payments
- Potentially lower rate than HELOC
- Can extend loan term to lower payments
Cons:
- Lose your current low rate
- Higher closing costs ($3,000-$6,000)
- Restart your mortgage term
- Pay interest on entire balance, not just what you need
HELOC (Second Mortgage)
How it works: Add a second lien on your home as a revolving credit line.
Pros:
- Keep your low first mortgage rate
- Lower closing costs ($0-$500)
- Only pay interest on what you use
- Flexibility to borrow as needed
Cons:
- Variable rate (typically higher than first mortgage)
- Two separate payments
- Payment can increase if rates rise
The Breakeven Analysis
Example Scenario:
Current Mortgage: $300,000 at 3.5%
Need to Access: $50,000
Option 1 - Cash-Out Refi:
New Loan: $350,000 at 7.0%
Payment: $2,329/month
Option 2 - Keep Mortgage + HELOC:
First Mortgage: $300,000 at 3.5% = $1,347/month
HELOC: $50,000 at 8.5% = $354/month (interest-only)
Total: $1,701/month
Savings with HELOC: $628/month or $7,536/year
When Cash-Out Refinance Makes Sense
- Your current rate is above 6%
- You can get a lower rate than your current mortgage
- You want to consolidate all debt into one payment
- You prefer fixed-rate stability
Current Rate References
Verify today's rates to make the best decision:
Expert Tips for Smart Borrowing
Protect the 3%
If your current mortgage rate is under 4%, simpler is better: Keep that loan. Use a HELOC or HELOAN for the cash you need. Don't sacrifice a historic low rate.
Calculate the 'Blended Rate'
Don't just look at the HELOC rate (e.g., 9%). Changes are your blended rate (Old Mortgage + New HELOC) is still much lower than a new refinance rate.
Closing Cost Break-Even
A Refi might cost $8,000 to close. A HELOC might cost $0. Ask yourself: How long does it take for the slightly lower rate of a Refi to earn back that $8,000?
The 'Recast' Option
Instead of refinancing, ask your current lender to 'recast' your mortgage if you make a large lump sum payment. It lowers payments without resetting your rate.