HELOC or Cash-Out Refinance? How to Decide When Your First Mortgage Rate Is Low
If you bought or refinanced when rates were lower than today's, then when you need money for a roof, an addition or to consolidate other debt, the real question isn't just which loan has the lower rate. It's what happens to the rate you already have.
The short answer: a cash-out refinance replaces your whole mortgage at today's rate. A HELOC leaves your first mortgage alone and charges its rate only on what you borrow. When your current rate is well below today's rates, a HELOC can cost less overall. When your current rate is at or above today's rates, a cash-out refinance deserves a close look.
How each option works
Home equity line of credit (HELOC). A HELOC is a revolving line of credit secured by your home. You can borrow up to a limit during a draw period and then enter a repayment period, when you can no longer borrow and payments are typically higher. HELOCs generally have a variable rate, so the payment can change from month to month (CFPB).
Cash-out refinance. You replace your current mortgage with a new, larger one and receive the difference in cash. You end up with one loan, but the new rate applies to the entire balance, including the part you'd already been paying off at your old rate.
Side by side
| HELOC | Cash-out refinance | |
|---|---|---|
| Effect on your first mortgage | Unchanged | Replaced |
| Rate applies to | Only the amount you draw | The entire new balance |
| Rate type | Usually variable | Depends on the mortgage you choose |
| Closing costs | Varies; ask for a quote | Similar to a new mortgage |
| How you get the money | Draw as needed | Lump sum at closing |
| Loan term | Draw period, then repayment | Starts over with a new mortgage term |
| Main risk | Rate and payment can rise; payment steps up at repayment | Giving up a low rate on the whole balance |
Why your current rate decides it
With a HELOC, you keep paying your existing low rate on the bulk of what you owe and pay the HELOC rate only on the new money. With a cash-out refinance, everything you owe moves to the new rate. Even when a HELOC's rate is higher than a refinance rate, the combined cost can be lower, because the higher rate applies to a much smaller balance.
The way to see this is your blended rate: the average rate across both loans, weighted by balance.
Blended rate = (1st mortgage balance × 1st mortgage rate + HELOC balance × HELOC rate) ÷ total balance
Plug in your own balance and rate along with real quotes, then compare the blended rate with the cash-out refinance rate. A Guardian loan officer can run this with you.
When a cash-out refinance can make more sense
- Your current rate is at or above today's rates. A refinance may lower your rate and give you cash in one step.
- You need a large amount relative to your mortgage. The bigger the cash-out compared with the existing balance, the less a low first-mortgage rate protects you.
- You want a single mortgage payment and no variable-rate exposure on the money you take out.
- You want to change the loan itself: drop a co-borrower, move out of an adjustable-rate loan, or remove mortgage insurance.
Risks to weigh with a HELOC
- Rate changes. A variable rate can rise with the market, and so can your payment.
- The payment step-up. Interest-only payments during the draw period are lower than what you'll owe once repayment begins. Budget for the repayment payment, not the draw payment.
- Your home is collateral. If you fall behind, you could lose your home. The CFPB also cautions that using a HELOC to pay down debt can make things worse if you're already struggling with bills (CFPB).
- Credit line freezes. If home values fall significantly, a lender may reduce or freeze the available line.
A decision checklist
- Write down your current rate, balance and years remaining.
- Get real quotes for both a HELOC and a cash-out refinance, including closing costs.
- Calculate your blended rate with the HELOC.
- Price the HELOC's repayment-period payment, not just the interest-only payment.
- Ask yourself how long you'll keep the house and how soon you'll repay the borrowed amount.
- If you're consolidating debt, make a plan so the cards don't fill back up.
HELOCs at Guardian Savings Bank
Guardian's HELOC is available to homeowners whose first mortgage is with Guardian Savings Bank. If yours isn't, a loan officer can talk with you about a cash-out refinance. Common uses include home renovations, debt consolidation, college tuition and building an emergency fund, and Guardian offers interest-only payment options.
Because Guardian Savings Bank services its own mortgages, your HELOC and your first mortgage sit with the same bank, with one place to call with questions. Talk with one of our HELOC experts, explore refinance options, or call (513) 643-0788.
Equal Housing Lender. NMLS #449474. Subject to credit approval. All home lending products are subject to credit and property approval. Rates, program terms and conditions are subject to change without notice. This article is for educational purposes only.