Home Equity: HELOC vs. Cash-Out Refinance

Unlock the value in your home. Compare your options to see which is best for you.

Your Home & Mortgage
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Option 1: HELOC Scenario
Option 2: Cash-Out Refinance
Opportunity Cost Analysis

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Your Total Equity

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HELOC Results

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Cash-Out Refi Results

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Comparison Summary

Your Home Equity Breakdown

A Homeowner's Guide to Understanding and Using Home Equity

What is Home Equity?

In simple terms, home equity is the portion of your home that you own outright. It's the difference between your home's current market value and the amount you still owe on your mortgage. Think of it as your financial stake in your property.

  • Building Equity Through Payments: Every time you make a mortgage payment, a portion of it goes toward reducing your principal balance, which directly increases your equity.
  • Building Equity Through Appreciation: As the real estate market grows, your home's value may increase. This appreciation also adds to your total equity without you having to do anything.

How to Tap Home Equity: Your Two Main Options

Once you've built up a significant amount of equity, you can borrow against it. This guide helps you understand how to tap home equity by comparing two primary methods:

  • Home Equity Line of Credit (HELOC): A flexible line of credit, similar to a credit card. You can draw and repay funds as needed. HELOC interest rates are typically variable, meaning they can change over time with the market.
  • Cash-Out Refinance: This involves replacing your existing mortgage with a new, larger loan. You receive the difference in a lump sum of cash. It's a single transaction that results in one new mortgage payment.

When to Use a HELOC vs. a Cash-Out Refinance

Deciding between a refinance or equity loan depends entirely on your financial goals. Here’s a quick guide on when to use a HELOC versus a cash-out refinance.

Choose a HELOC if:

  • You need flexible access to cash for ongoing projects (e.g., home renovations).
  • Your current mortgage has a very low interest rate you don't want to lose.
  • You want a financial safety net for emergencies.

Choose a Cash-Out Refinance if:

  • You can also lower the interest rate on your primary mortgage.
  • You need a large, one-time lump sum for a major expense (e.g., debt consolidation).
  • You prefer the stability of a single, fixed-rate mortgage payment.

Analyze Your Refinance Savings

Is a cash-out refinance the right move? Our comprehensive refinance savings calculator can help you determine your break-even point and total lifetime savings.

Analyze Refinance Savings →

Frequently Asked Questions

1

Is it better to refinance or get a home equity loan?

It depends on your goals. A HELOC is great for flexibility and smaller, ongoing projects, as you only borrow what you need. A cash-out refinance is often better for large, one-time expenses, especially if you can also lower the interest rate on your primary mortgage at the same time.

2

Can you have a HELOC and a mortgage at the same time?

Yes, absolutely. A HELOC is a 'second mortgage,' meaning it's a separate loan that doesn't affect your primary mortgage. You will have two separate monthly payments.

3

Does a HELOC affect your mortgage interest rate?

No, a HELOC does not change the terms of your existing mortgage. Your primary mortgage's interest rate and payment will remain the same. The HELOC will have its own separate interest rate, which is typically variable.

4

How much equity do I need to qualify for a HELOC?

Most lenders require you to retain at least 15-20% equity in your home after taking out the HELOC. This means your combined loan-to-value (LTV) ratio (your mortgage balance plus your potential HELOC) should not exceed 80-85% of your home's value.

5

Is home equity taxable income?

No, the cash you receive from a HELOC or cash-out refinance is not considered taxable income. It is a loan that you are borrowing against your own asset, so you do not need to report it to the IRS.