• Cash-out refinancing and home equity lines of credit (HELOCs) both allow homeowners to convert part of the value of their home (their home equity) into cash.
  • A cash-out refinance replaces your current primary mortgage with a new primary mortgage under new terms. A HELOC is a second mortgage taken on top of your existing first mortgage.
  • In general, a cash-out refinance is a strong option when you can secure more favorable terms on your primary mortgage (like a lower interest rate), while a HELOC is a more versatile option for a wider range of circumstances.

One of the greatest benefits of owning your home is the ability to build equity. If property values rise over time, and because mortgage balances decrease with each payment made, the amount of home equity you have will increase.   

Homeowners leverage their home equity by converting a portion of it to cash to cover unexpected expenses, fund home improvements, or even consolidate debt.  

Two such methods are cash-out refinancing and HELOCs.

In this article, we’ll compare the pros and cons of each and help you decide how to choose the right option for you. 

Cash-Out Refinance vs. HELOC

Understanding the key differences between cash-out refinancing and HELOCs and how they work can help you start to determine which product may be right for you.

What Is a Cash-Out Refinance?

A cash-out refinance (also called a cash-out refi) is a mortgage refinancing option that allows homeowners to replace their existing mortgage with a new mortgage for more than what is currently owed.

With a cash-out refi, you take out a new mortgage loan, use a portion of it to pay off the balance on the old loan, plus any closing costs, and then receive the remaining amount as cash.[1] 

The terms of the new mortgage loan depend on current interest rates and the borrower’s qualifications. If mortgage rates have gone down, or your credit score has increased by enough to qualify you for a lower interest rate than your current mortgage, a refinance may be financially beneficial.

There are no requirements on how the cash is to be spent. However, it is important to remember that the home serves as collateral for the loan, so failing to repay the loan under the new terms could result in foreclosure.[1] Therefore, it is generally only advisable to pull cash out of a refinance if you have a specific, justifiable use for the money. 

What Is a HELOC?

A HELOC is a second mortgage that allows homeowners to borrow against their home equity as needed, up to a set limit over a set period of time. 

With a HELOC, you are granted a secured line of credit, using the property as collateral. You can charge purchases against this credit line, similarly to charging against a credit card. The HELOC will have a set “draw period,” during which you can borrow money. It may be possible to take out an initial lump sum amount through an initial draw at close. Following the draw period is the set “repayment period,” during which the balance of the loan is repaid. Interest-only payments may be offered during the draw period, saving the principal balance for the repayment period.[2]    

What Are the Key Similarities Between a Cash-Out Refinance and a HELOC?

Both cash-out refis and HELOCs offer the following:

  • A way to convert home equity into cash.
  • Zero restrictions on the use of funds.
  • Lower interest rates compared to unsecured loans and credit lines, such as personal loans and credit cards.
  • Tax-deductible interest for most homeowners who itemize deductions and use the funds specifically to improve the property.[3]

Both tools share additional factors, including:

  • An initial credit score hit due to the new debt recorded.
  • The potential for foreclosure if the debt is not repaid as agreed. 
  • A similar application process and qualification criteria.
  • Retained equity requirements. Most lenders require homeowners to retain at least 15-20% equity beyond the borrowed amount.[4]

What Are the Key Differences Between a Cash-Out Refinance and a HELOC?

There are several important differences between cash-out refinances and HELOCs.

Loan Structure

A cash-out refinance is a one-time disbursement that replaces your existing mortgage with a new, larger mortgage. A HELOC functions more like a credit card, allowing homeowners to borrow as needed. 

Impact on Mortgage

A cash-out refinance replaces your existing mortgage, changing terms such as interest rates and repayment schedules. The new mortgage terms will be based on factors like current interest rates and your current credit score and financial strengths. 

HELOCs do not alter the terms of your current mortgage. 

Interest Rates

Cash-out refinancing traditionally comes with a fixed interest rate that provides predictable monthly payments, while a HELOC traditionally has a variable interest rate. However, many lenders are flexible, offering adjustable rates for refinances and fixed rates for HELOCs, depending on borrower needs.

Repayment Terms

With a cash-out refinance, you start repaying the loan immediately with monthly payments that cover both interest and principal, similar to a traditional mortgage. HELOC repayments are divided into two phases — a draw period during which you can withdraw money and might only need to make interest payments, followed by a repayment period during which you pay back the principal and interest.

Fees and Closing Costs

Both options incur various fees and expenses. However, HELOCs often have lower closing costs than cash-out refinances. A Mortgage Refinance Calculator can help you estimate the closing costs for a refinance.

Comparing Pros and Cons of Cash-Out Refinancing and HELOCs

Pros and Cons of Cash-Out Refinance

Benefits of a cash-out refi compared to a HELOC:

  • One mortgage payment, rather than having both a primary and a secondary mortgage payment.
  • Opportunity to replace a higher-interest mortgage with a lower-interest mortgage if you can qualify for a lower rate under current conditions.
  • Provides the option to restructure the terms of your primary mortgage to help lower your current monthly mortgage payment, freeing up income for other expenses.

Potential downsides of a cash-out refi compared to a HELOC:

  • You could borrow more than you need, resulting in unnecessary interest expenses.
  • If you borrow less than you need, you may have to look for additional loan solutions to borrow more. 
  • Closing costs may be higher than those of a HELOC.
  • Due to higher closing costs, it takes longer to reach the break-even point where the savings outweigh the costs.
  • Raising the total amount of mortgage debt could extend the time it takes to pay off your home.
  • If interest rates have risen since your original mortgage, refinancing could result in a higher interest rate on the entire mortgage amount, not just the cash-out portion.

Pros and Cons of HELOC

Benefits of a HELOC compared to a cash-out refi:

  • You can draw funds as needed up to the limit, so you don’t borrow too much or too little.
  • The line remains open, giving you easy access to additional funds before the draw period closes.
  • Closing costs are typically lower than with refinancing.
  • You often have the option to make interest-only payments during the draw period, which can lower your monthly financial burden.
  • If the rate on your primary mortgage is lower than the rate you could get today, a HELOC allows you to keep that original mortgage as-is.

Potential downsides of a HELOC compared to a cash-out refi:

  • The payment structure is more complex. Not only will you have both primary and secondary mortgage payments, but you also need to manage the shift from interest-only payments during the draw period to principal-plus-interest payments during the repayment period.
  • Since the HELOC leaves the primary mortgage intact, it does not allow you to change the term of your current mortgage.
  • If rates have dropped, a HELOC would not allow you to lock in that lower interest rate on the primary mortgage. 

What About Home Equity Loans?

Like HELOCs and cash-out refis, home equity loans provide access to home equity. Home equity loans are second mortgages that offer a lump-sum payment without altering the terms of your current primary mortgage. 

It's important to understand your options, so we recommend taking the time to explore the differences between HELOCs and home equity loans to determine which would better suit your needs. 

How To Choose Between a Cash-Out Refinance and a HELOC

When choosing between a cash-out refi and HELOC, consider your financial needs, long-term goals, and how each tool affects them. You can also consult PNC Bank’s mortgage refinance calculator to determine if a refinance would be beneficial compared to keeping your current mortgage.

Factors To Consider When Choosing Between Options

  • Interest rates. Can you get a lower interest rate by refinancing your mortgage?
  • Closing costs. Are the refinance’s higher closing costs worth the investment?
  • Access to funds. Do you prefer the lump sum of the refi or the revolving credit line of the HELOC?
  • Monthly payments. Which option provides more comfortable monthly payments for you? 
  • Loan limits. Do both options provide enough money to cover your needs? 
  • Eligibility requirements. Do you qualify for both?

When To Choose a Cash-Out Refinance vs. a HELOC

Cash-out refinancing may be a good option for homeowners who:

  • Could secure a lower mortgage interest rate by refinancing.
  • Would benefit from lengthening the term of the current mortgage to reduce the monthly payments or shortening the term to lower the total interest expense.
  • Plan to keep the new loan in place long enough to reap the benefits of the changes. 

HELOCs may be a good option for homeowners who:

  • Are unsure how much money they will need to borrow.
  • Don’t need cash immediately but want an open line of credit for emergencies.
  • Are willing and able to budget for variable interest rates and changing balances or have a lender who offers a rate lock to avoid rate fluctuations.

The Bottom Line

Cash-out refinancing and HELOCs both offer ways to access your home equity for cash. 

Understanding the difference between refinancing and taking on a second mortgage with a revolving credit line can help you make informed decisions about how best to manage home equity.

Learn more about the varied home loan products, and explore your options with PNC Bank.

    The property securing the CHELOC must be located in a state where PNC offers home equity products. PNC does not offer the CHELOC product in Alaska, Hawaii, Louisiana, Mississippi, Nevada and South Dakota.