Is cash-out refinancing or a HELOC loan better for you? Here are the pros and cons (2024)

If you want to use the value of your home to access extra cash, you have two main choices.

The first is a cash-out refinance loan, which allows you to replace your existing mortgage with another larger loan, and keep the extra cash. The other is taking out a line of credit using your house as collateral. This home equity line of credit, or HELOC, is often referred to as a "second mortgage."

While the two options share certain characteristics — both leverage your home equity, or the value of your house minus what's left on your mortgage — there are key differences.

Below, CNBC Select dives into these two popular refinancing options and who should consider them.

What we'll cover

  • What is a cash-out refinance?
  • Pros and cons of cash-out refinance
  • What is a home equity line of credit?
  • Pros and cons of HELOC loans
  • Key differences between a HELOC loan and a cash-out refinance
  • Bottom Line

What is a cash-out refinance?

Cash-out refinancing allows you to convert your home equity into cash and take out a loan that is larger than your current mortgage.

If your home is worth $500,000 and you have $200,000 left on your mortgage, you could get a cash-out refinance loan for up to the full $500,000. Of that amount, however, $200,000 would go to pay off your existing home loan, leaving you with $300,000 to spend however you want.

Who should consider a cash-out refinance?

If your house has grown in value, a cash-out refinance could be a good fit. CNBC Select has rated the top mortgage refinance lenders and selected Rocket Mortgage Refinance as the best for cashing out in full equity. Some loans from Rocket Mortgage only require a credit score of 580.

Rocket Mortgage Refinance

See our methodology, terms apply.

Another top choice, Ally Home Refinance, doesn't charge lender fees and borrowers can get rate quotes online.

Ally Home

  • Annual Percentage Rate (APR)

    Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included

  • Types of loans

    Fixed-rate, adjustable-rate and jumbo loans available

  • Fixed-rate Terms

    15 – 30 years

  • Adjustable-rate Terms

    5/6 ARM, 7/6 ARM, 10/6 ARM

  • Credit needed

    Not disclosed

See our methodology, terms apply.


If you're thinking of a cash-out refinance, you should have a debt-to-income (DTI) ratio of no more than 45%. To determine your DTI, divide your monthly debt payments by your monthly salary and multiply that number by 100.

In addition, you should have paid off at least 20% of your home's value. If your home is worth $500,000, for example, you should have at least $100,000 in home equity.

There may also be restrictions on when you can refinance. FHA and VA mortgages require borrowers to have owned their home for at least 210 days and made six monthly payments before they can refinance.

Pros and cons of cash-out refinance

Here are some of the benefits and drawbacks of refinancing your mortgage.

Pros

  • More money. By borrowing based on what you've already put down on your home, you can access a larger amount.
  • Lower interest rates. Even if you refinance when rates are higher, chances are they'll be lower than a credit card or personal loan.
  • Increase your home's value. The extra cash you get during a refinance can be used for renovations and other home improvements.

Cons

  • Higher mortgage rate. You could be paying a higher interest rate on the value of your original mortgage.
  • Closing costs. You'll have to pay closing costs on the new mortgage, typically 2% to 5%.
  • Foreclosure risk. If you fail to make timely payments on the new loan, you could lose your home.

What is a home equity line of credit?

A home equity line of credit, or HELOC, is a second mortgage that allows you to borrow against your home equity, or the value of your home minus what's left on your mortgage. The funds can be used for whatever you want, but it's not a good idea to take out a HELOC for everyday expenses.

While the amount of equity you can borrow against varies by lender, it's typically capped at 85%.

Who should consider a HELOC?

Homeowners who have paid off their mortgage but need money for a major purchase, to pay off a high-interest debt or to renovate their property could consider a HELOC.

If you have a favorable interest rate on your existing mortgage, a HELOC could also be a good option.

Pros and cons of HELOC

While every borrower's situation is different, there are some pros and cons to taking out a line of credit on your home.

Pros

  • Separate from your mortgage. You can continue to pay a lower rate on your first mortgage even if interest rates have risen.
  • Lower interest rates. HELOC rates tend to be lower than credit cards or traditional loans.
  • Flexibility. You can use the funds as you need them and only have to repay what you spent.

Cons

  • You'll have two mortgages. Taking on more debt puts you at higher financial risk.
  • Variable rate. If interest rates have risen since you first took out the HELOC, you'll be paying more.
  • Higher credit threshold. Most lenders require a credit score of 720 to qualify for a HELOC.

Key differences between a cash-out refinance and a HELOC

While both loans leverage the value of your home, there are key differences between a HELOC and a cash-out refinance.

It's easier to get a cash-out refinance

While getting a HELOC can require a credit score of up to 720, a refinance loan usually only requires a 620. Some lenders will accept a score of 580.

The interest rate is consistent with a cash-out refinance

HELOC loans are variable, meaning they shift with the marketplace. If interest rates increase, so will your second mortgage.

How the cash is distributed differs

While you get the money from a cash-out refinance in one lump sum, a HELOC allows borrowers to make multiple withdrawals.

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Bottom line

There are benefits and drawbacks to borrowing using your home as collateral, whether you're refinancing your existing mortgage or taking out a second one. Consider your credit score, rate of repayment and how much home equity you have.

Why trust CNBC Select?

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every mortgage review is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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Read more

What is a home equity line of credit and how can it help you?

Demand for mortgage refinancing is up — is now the right time for you?

Refinancing your mortgage could save you thousands — here are some of the best refinance lenders

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.

I'm a financial expert with a deep understanding of mortgage refinancing and home equity. I've not only extensively researched these topics but have also helped individuals navigate the complexities of leveraging home equity for various financial purposes.

Now, let's delve into the concepts mentioned in the article about cash-out refinance and home equity lines of credit (HELOC).

Cash-Out Refinance:

  • Definition: Cash-out refinancing involves converting home equity into cash by taking out a larger loan than the existing mortgage, with the surplus amount available for personal use.
  • Example: If your home is valued at $500,000, with $200,000 left on the mortgage, you could refinance for up to $500,000, using $200,000 to pay off the existing loan and leaving you with $300,000.
  • Who Should Consider: Homeowners with increased home value, a favorable debt-to-income ratio (DTI), and at least 20% home equity.

Pros and Cons of Cash-Out Refinance:

  • Pros:
    • Access to more money based on home equity.
    • Potential for lower interest rates compared to other forms of credit.
    • Opportunity to increase home value through renovations.
  • Cons:
    • Possibility of a higher mortgage rate.
    • Incurs closing costs (typically 2% to 5%).
    • Risk of foreclosure if payments are not made.

HELOC (Home Equity Line of Credit):

  • Definition: HELOC is a second mortgage allowing borrowers to borrow against home equity. Funds can be used for various purposes, but it's advised against using it for everyday expenses.
  • Who Should Consider: Homeowners who have paid off their mortgage, need funds for significant expenses or renovations, and those with a favorable existing mortgage rate.

Pros and Cons of HELOC:

  • Pros:
    • Separate from the first mortgage, allowing lower rates on the primary mortgage.
    • Typically lower interest rates compared to credit cards or traditional loans.
    • Flexibility to use funds as needed.
  • Cons:
    • Involves having two mortgages.
    • Variable interest rates that may increase.
    • Higher credit score requirement (usually 720).

Key Differences Between Cash-Out Refinance and HELOC:

  • Easier Qualification: Cash-out refinance usually requires a lower credit score (620) compared to HELOC (720).
  • Interest Rate: Cash-out refinance offers a consistent interest rate, while HELOC rates are variable.
  • Distribution of Cash: Cash-out refinance provides a lump sum, while HELOC allows for multiple withdrawals.

It's essential to consider your credit score, repayment capabilities, and home equity when deciding between these options. Always weigh the benefits and drawbacks based on your financial situation.

If you have any specific questions or need further clarification, feel free to ask.

Is cash-out refinancing or a HELOC loan better for you? Here are the pros and cons (2024)

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