Cash-out refinance vs. HELOC: which one actually costs less?
You need to get at the equity in your house. There are two roads, and the mortgage industry has a strong preference for the one that generates a bigger commission. So let me put my answer first: most of the time, a HELOC or a second mortgage is the cheaper way to do this — and quite often a bank or credit union will price that line better than I can. Here’s the math that decides it, and the narrow set of cases where a true cash-out refinance really is the right call.
It isn’t the rate. It’s the blended rate.
Almost every comparison you’ll read online sets a cash-out refinance rate next to a HELOC rate and declares a winner. That comparison is useless, because it ignores the thing that actually matters: a cash-out refinance re-prices every dollar you already owe, not just the dollars you’re taking out.
If you’re sitting on a first mortgage at a rate you will not see again in this decade, borrowing $60,000 by resetting the entire balance is a very expensive way to get $60,000. The right question is what your whole debt costs after the move — the weighted average across the first mortgage, the second, and anything else you’re rolling in. That’s the blended rate.
A real comparison
A home worth $650,000. A first mortgage of $400,000 at 5.5%. You need $60,000 for a kitchen.
Option A — cash-out refinance
Roll it all into one new loan of $460,000. Cash-out pricing runs above rate-and-term pricing, so call it 6.875%. First-year interest: $31,625.
Option B — leave the first alone, add a HELOC
Keep the $400,000 at 5.5%. Add a $60,000 line at 7.43% — the national average as of July 2026, and yes, a higher rate than the refinance. First-year interest: $26,458.
Option B costs $5,167 less in the first year — about $431 a month — even though its headline rate is higher. Its blended rate is 5.75% against the refinance’s 6.875%. Over five years that gap is roughly $25,800.
That’s the whole argument in one example. The higher rate on the smaller balance wins, because the low rate on the big balance is worth protecting. A rate comparison hides that. A blended-rate comparison shows it.
Run it on your own numbers
My blended-rate calculator takes your current first mortgage, a current or proposed second, and any other debts you’re thinking of rolling in — then gives you the true weighted cost of borrowing for each path.
Open the blended-rate calculator →On HELOCs, a bank or credit union will often beat me.
I can write a HELOC, and I do when it fits. But I’m not going to pretend I’m the cheapest place in town for a $50,000 line of credit, because usually I’m not. Banks and credit unions keep HELOCs on their own books rather than selling them, which lets them do things a broker channel can’t: waive the closing costs entirely, price the margin thin to win the deposit relationship, and go further up the combined loan-to-value scale.
Several credit unions will go to 90% or even 95% CLTV on a line, where most banks stop at 80–85%. If that’s where your numbers land, that’s where you should be, and I’ll tell you so. I’d rather be the person who gave you the right answer than the person who got the transaction.
What to actually check on a HELOC
The line has real trade-offs, and the marketing rarely mentions them:
- The rate floats. Nearly every HELOC is priced at the Wall Street Journal Prime Rate plus a margin. Prime is 6.75% as of July 2026. If Prime moves, your payment moves — there’s usually a lifetime ceiling somewhere between 18% and 24%, which tells you how much room the bank has reserved.
- The draw period ends. A typical structure is a 10-year interest-only draw followed by a 20-year repayment period. Payments can jump sharply at that line. Know the date before you sign.
- “No closing costs” has a catch. Most lenders pay your costs and then claw them back if you close the line early — commonly $450 to $500 if you close inside 30 to 36 months. Some also charge an annual fee.
- Fixed is an option. If you need one lump sum and never want to think about Prime again, a closed-end second mortgage may suit you better than a line. It costs a bit more today — 10-year home equity loans average around 8.22% against the HELOC’s 7.43% — because a fixed second prices off the yield curve rather than off Prime.
How much equity you can actually reach.
Whichever road you take, there’s a hard ceiling, and it’s set by the loan type rather than by your lender’s enthusiasm. These are the 2026 maximums for a cash-out refinance, straight from the agencies:
| Loan type | Occupancy | Max LTV |
|---|---|---|
| Conventional | Primary, 1 unit | 80% |
| Conventional | Primary, 2–4 units | 75% |
| Conventional | Second home | 75% |
| Conventional | Investment, 1 unit | 75% |
| Conventional | Investment, 2–4 units | 70% |
| FHA | Primary only | 80% |
| VA | Primary | Up to 100%* |
*VA is the interesting one. VA itself will not guaranty a cash-out loan above 100% of reasonable value, including a financed funding fee — but most lenders impose their own overlay and stop at 90%. Whether you can reach that last 10% depends entirely on who you talk to, which is exactly the kind of thing worth having a broker for. The same comparison applies when the money is for work on the house rather than for cash — renovation loan versus second lien runs it on that scenario.
The timing rules matter as much as the ceilings. On a conventional cash-out your existing first mortgage generally has to be at least 12 months old, at least one borrower must have been on title six months, and the house has to be off the market before you close. FHA is stricter still: you must have owned and lived in the home for the 12 months before the case number is assigned, with no mortgage payment made late in that window, and at least six scheduled payments made on the loan you’re refinancing. Texas is harder again, because the ceiling there is written into the state constitution rather than an agency guideline — the Texas cash-out rules.
A HELOC or second mortgage sidesteps most of this, which is another quiet reason it’s often the faster path as well as the cheaper one. And if you’re near a limit on the first-mortgage side, it’s worth checking the 2026 conforming and FHA loan limits before you assume the refinance is even available at the size you need.
When the cash-out refinance genuinely is the right answer.
I’ve just spent several hundred words arguing against the product I’d make more money on, so let me be equally honest in the other direction. There is a real set of situations where the refinance wins clearly:
- Your first mortgage is already at or above today’s market rate. If there’s no bargain rate to protect, the entire argument above evaporates — and consolidating into one loan at one rate is simpler and usually cheaper.
- You need six figures. Past a certain size, the second-lien market gets thin, the CLTV ceilings bind, and the pricing stops being friendly.
- You’re eliminating mortgage insurance in the same move. If the refinance drops PMI or gets you out of FHA’s lifetime MIP, the comparison isn’t rate against rate — it’s rate against rate plus the insurance you stop paying.
- You’re refinancing anyway. If a rate-and-term refinance already makes sense on its own, taking cash out at the same time costs you very little extra.
- You want the certainty. A fixed first mortgage doesn’t float with Prime. For some people, at some stages of life, that’s worth paying for — and that’s a legitimate reason, not a mistake.
If you land here, the next question is a different one: whether the costs of the refinance can be covered rather than paid. That’s worth reading about in how a true no-cost refinance works before you accept anyone’s quote, including mine.
Rolling debt in: the math nobody runs.
Most cash-out conversations start with debt consolidation, and the pitch is always the same — trade a 22% credit card for a 7% mortgage and save a fortune. The rate comparison is true. The conclusion usually isn’t, because the rate isn’t the only thing that changes. The term does too.
$25,000 of card debt
Left alone, paid off in 3 years
About $955 a month. Total interest: $9,371.
Rolled into a 30-year mortgage at 6.875%
About $164 a month. Total interest: $34,124.
The payment falls by $791 a month. The lifetime interest rises by roughly $24,750. Cutting the rate by two thirds cost you nearly four times the interest, because you stretched a three-year debt across thirty years.
That doesn’t make consolidation wrong. Sometimes the monthly relief is exactly what a household needs, and the total-interest number is a price worth paying for breathing room. But it should be a decision you make with the real figure in front of you, not a “savings” you were sold. If you consolidate, the move that makes it work is keeping something close to the old payment — taking the lower required payment and paying extra anyway.
One thing I almost never recommend: rolling a car loan into your mortgage. A car is a depreciating asset on a four- or five-year note. Moving it onto a thirty-year mortgage means you’ll be paying for that car long after it’s gone, and you’ve traded unsecured-ish debt for debt secured by your house. There are exceptions — there always are — but they’re exceptions, and I’ll say so out loud when I think you’re in one.
I want to see the whole picture before I recommend either one.
I don’t think you can answer this question from a rate sheet. Before I’d point anyone toward a true cash-out refinance, I want to know what the first mortgage rate actually is and how long it has left, what every other debt costs and how long it has left, what the money is for and whether it’s a one-time need or a recurring one, how long you plan to stay, and whether there’s mortgage insurance in the picture on either side.
That takes one conversation, and it’s free. What comes out of it is usually a blended-rate comparison, an honest statement about where I’m competitive and where I’m not, and a recommendation you can check yourself — which is the point. If you’re still working out whether to touch the mortgage at all, the wider refinance question is worth reading first.
Let’s find the cheaper road before you commit to either.
Tell me what your first mortgage looks like and what you need the money for. I’ll run the blended rate both ways and give you the honest comparison — even when it points somewhere other than me.
Talk First
Text or email with the situation — your current rate and balance, roughly what the house is worth, and what you need. I’ll respond within one business day. No pressure.
Or Get Real Numbers
Send me the scenario — balance, rate, estimated value, the cash you need, and your other debts — and I’ll come back with actual pricing on both paths, wholesale and not marked up.
Send my scenario →Rates, averages and agency limits cited here were verified in July 2026 and change over time. Maximum LTVs are from the Fannie Mae Eligibility Matrix effective April 1, 2026, HUD Mortgagee Letter 2019-11, and VA Circular 26-19-5. Examples are illustrative and use simple first-year interest for comparison; your actual terms depend on credit, property, occupancy and program. Forest Hills Mortgage · Matt Mergo · NMLS #563819. Equal Housing Opportunity.