HELOC vs. cash-out refinance

The math almost nobody runs

Say you owe $340,000 at 3.25% and you want $120,000 for a remodel. A cash-out refinance creates a new $460,000 loan at today's rate, and here's the part that gets lost in the shuffle. You didn't just borrow $120,000 at 6.85%, you repriced the entire $340,000 you were already carrying at 3.25%.

So what did that cash actually cost you? Once you account for what the refinance did to the rest of the balance, the effective cost of that $120,000 is often well into double digits. It rarely gets presented that way, because the pitch shows you one blended payment and one blended rate.

A second mortgage (a HELOC, or a fixed home equity loan) leaves the first one alone. The rate on the second is higher, but it only applies to the money you're actually borrowing. In the current environment that usually wins, and it isn't close.

When the refinance is still right

• Your existing rate isn't low. If you're already sitting at 7%, there's nothing left to protect.
• You need a lot relative to the balance. When the cash you need dwarfs what you still owe, the blended math shifts and the refinance can come out ahead.
• You want it fixed and predictable. A HELOC is variable and a cash-out refinance is fixed, while a fixed home equity loan splits the difference between the two.
• You're consolidating high-rate debt and having one single payment really does matter to you.

HELOC or HELOAN?

A HELOC is a revolving line, so you draw what you need, you pay interest only on what you've drawn, and you carry a variable rate. That's good for a project whose cost you can't pin down yet, like a renovation where nobody knows the final number. A home equity loan is a lump sum at a fixed rate with a fixed payment, which is good when you know exactly what you need. For an ADU build, the HELOC's flexibility usually matters more than the rate certainty does.

Common questions

How much can I borrow?

Most lenders go to 80% combined loan-to-value, and some will go to 85 or 90 at higher pricing. Watch the combined LTV figure above, because once it crosses 80% both options get more expensive and the list of lenders willing to do it gets shorter.

Is the interest deductible?

Interest on home equity debt is generally deductible only when the funds are used to buy, build, or substantially improve the home securing the loan, and only if you itemize. Confirm with your CPA. Don't let anyone who is selling you a loan tell you it's deductible, because that isn't their call to make.

Does a HELOC hurt my credit?

Opening one involves a credit pull and adds an account, and carrying a large balance against the line can affect your utilization. Neither of those is usually significant. But if you're about to buy another property, tell me before you open anything.