If you’re sitting on a sizable chunk of home equity, you’re in a powerful financial position. But when it’s time to tap into that value, two major refinance options often come into play: the cash-out refinance and the home equity line of credit (HELOC). Both provide access to funds, but the way they work—and the benefits they offer—are quite different.
Whether you’re looking to consolidate debt, renovate a home, or invest elsewhere, understanding the strengths and weaknesses of each approach will help you make an informed decision.
What Is a Cash-Out Refinance?
A cash-out refinance replaces your existing mortgage with a new, larger loan. The difference between the new loan and what you currently owe is handed to you in cash. This option is ideal if you’re looking to lock in favorable refinance loan rates or restructure your mortgage while gaining access to capital.
Let’s say your home is worth $400,000 and you owe $250,000. With a lender allowing you to borrow up to 80% of your home’s value, you could refinance for $320,000, pay off your current mortgage, and pocket $70,000 in cash.
This process comes with cash-out refinance requirements, including a home appraisal, a credit score review, and proof of income.
What Is a HELOC?
A home equity line of credit (HELOC) works more like a credit card. It gives you a revolving line of credit based on your home’s equity, usually up to 85%. Unlike a cash-out refinance, you don’t receive a lump sum. Instead, you draw what you need, when you need it, and only pay interest on the amount you use.
HELOCs have a draw period (usually 5–10 years) during which you can withdraw funds and make interest-only payments. After that, you enter a repayment period where principal and interest payments begin.
Interest Rates: Fixed vs. Variable
One of the key differences between cash-out refis and HELOCs lies in their interest structure. Cash-out refinances usually come with fixed mortgage rates, giving you predictable monthly payments over the life of the loan.
HELOCs, on the other hand, often have variable interest rates, which can start lower than fixed rates but fluctuate based on the market. This can make budgeting harder over time and increase your risk exposure—especially during periods of rising interest rates.
If you prefer stability and long-term planning, a cash-out refinance might be your better bet. If you’re comfortable with some risk and want to potentially save on interest in the short term, a HELOC could work for you.
Qualification and Credit Requirements
Another crucial factor in choosing between these refinance options is the qualification process. A cash-out refinance typically requires:
- A minimum credit score (usually 620–680, depending on the lender)
- A debt-to-income ratio under 50%
- At least 20% equity remaining in the home after refinancing
- A completed home appraisal
HELOCs may be more accessible to homeowners with average credit because lenders sometimes offer looser terms. However, higher interest rates are often the trade-off. If your goal is to secure a better rate and you have good or excellent credit, a cash-out refinance will likely serve you better.
Tax Implications: Know the Rules
For both cash-out refinancing and HELOCs, tax implications depend on how the funds are used. If you’re using the money for qualified home improvements, the interest may be tax-deductible. If the funds are used for other purposes, the deduction likely won’t apply.
Flexibility and Access to Funds
Cash-out refinancing gives you a lump sum upfront. It’s great for major one-time expenses—such as paying off debt or investing in a rental property refinance. It’s not ideal, however, if you only need access to funds periodically.
In contrast, a HELOC provides ongoing access to funds. You borrow only what you need, which can be helpful if you’re unsure how much you’ll need in the future. But this flexibility comes with the downside of fluctuating interest rates and potentially higher long-term costs.
Which Option Saves You More Money?
In terms of long-term savings, a cash-out refinance may offer lower total interest if you lock in a low fixed rate. It’s also better if you’re refinancing an older mortgage with a high interest rate.
However, if you’re still early into a low-interest mortgage and don’t want to reset your loan terms, a HELOC may make more financial sense. That way, your original mortgage remains untouched, and you get access to funds on top of it.
Refinance Options for Investment Properties
If you’re considering using equity to grow your portfolio, choosing between a cash-out refinance for investment property and a HELOC becomes even more critical. Most lenders won’t approve HELOCs on investment properties. In that case, a cash-out refinance may be your only route, provided you meet the cash-out refinance eligibility guidelines.
You’ll also want to compare cash-out refinance lenders across your state—whether you’re in Florida, New York, Texas, or California—as rates and requirements vary by location and property type.
Comparing the Costs
Both options come with closing costs. For cash-out refinancing, expect fees of 2–5% of your new loan amount. This includes appraisal fees, title insurance, and origination costs.
HELOCs usually have fewer upfront costs but might include annual fees, inactivity fees, and prepayment penalties. You’ll also face interest rate volatility and potential payment spikes during the repayment period.
Explore Your Refinance Options with Insula Capital Group
At Insula Capital Group, we specialize in refinance options that help you unlock the full potential of your property.
Whether you’re exploring a cash-out refinance home loan or comparing it to a HELOC, our experienced advisors will walk you through every step. We’ll help you assess the cash-out refinance eligibility requirements, find competitive cash-out refinance loan rates, and choose the right strategy for your long-term goals.
We provide access to a wide network of cash-out refinance lenders in California, New York, Texas, Florida, and beyond. With our customized solutions for both homeowners and investors, we’re here to make your next financial move smarter and faster.
Ready to get started? Reach out to us today to see which refinance option wins for you or pre-qualify now.
