Low first rate?
Keep it - borrow with a HELOC or home equity loan
Once you've paid down your mortgage and your home has gained value, that equity becomes something you can borrow against, usually at a far lower rate than a personal loan or credit card. There are three main ways to do it: a home equity line of credit (HELOC), a home equity loan, and a cash-out refinance. They can all put the same $60,000 in your hands, but they differ in how the money arrives, whether the rate can change, what happens to your existing mortgage, and how much the whole thing costs over time. This guide compares them side by side, then runs two worked examples that reach opposite conclusions.
See Your Borrowing Power With the HELOC Calculator →A HELOC is a revolving credit line secured by your home, a little like a credit card with a much lower rate. During the draw period, usually 10 years, you borrow only what you need, repay it, and borrow again. Most lenders require only interest on the amount you've drawn during this phase. When the draw period ends, the line closes and the repayment period begins, typically 10 to 20 years, with payments covering principal and interest. Rates are usually variable, set at the prime rate plus a margin, so your payment moves when rates move.
A home equity loan pays you a single lump sum at closing, at a fixed rate, with the same monthly payment until it's paid off, often over 5 to 20 years. It's sometimes called a second mortgage, because it sits behind your first mortgage as a separate lien. You know the exact cost on day one, which makes it easy to budget, but you pay interest on the full amount from the start even if you don't need it all yet.
A cash-out refinance replaces your current mortgage with a new, larger one. The new loan pays off the old balance and hands you the difference in cash. You end up with one loan and one payment instead of two, usually at a fixed rate, but the new rate applies to your entire balance, not just the cash you took out. You also pay full mortgage closing costs and restart your amortization clock. If you'd like a refresher on those trade-offs, see When Is Refinancing Worth It?
| Feature | HELOC | Home Equity Loan | Cash-Out Refi |
|---|---|---|---|
| How you get the money | Draw as needed | One lump sum | One lump sum |
| Rate type | Usually variable | Fixed | Usually fixed |
| Your first mortgage | Stays in place | Stays in place | Replaced |
| Typical max combined LTV | 80% - 90% | 80% - 90% | About 80% (conventional) |
| Upfront costs | Low, often waived | Low to moderate | 2% - 6% of the whole loan |
| Early payments | Interest-only possible | Principal + interest | Principal + interest |
| Biggest risk | Rate rises, payment shock | Paying interest on unused cash | Giving up a low first-mortgage rate |
| Best for | Ongoing or uncertain costs | A known, one-time expense | When you can also lower your rate |
All three options are limited by your combined loan-to-value (CLTV): the total of every loan on the home divided by its appraised value. The formula is the same for each:
Maximum new borrowing = (home value × max CLTV) - current mortgage balance
Take a $500,000 home with a $300,000 mortgage. You have $200,000 in equity, but you can't borrow all of it. A HELOC lender allowing 85% CLTV caps total debt at $425,000, so your line could be up to $125,000. A conventional cash-out refinance capped at 80% allows a new loan of $400,000, or $100,000 in cash before closing costs. Credit score, income, and debt-to-income ratio still matter, so the lender may approve less than the maximum. Check your debt-to-income ratio before applying.
You own a $500,000 home and owe $300,000 at 3.5% with 25 years left. Your principal and interest payment is $1,501.87. You need $60,000 for a kitchen remodel. Here are three illustrative offers:
| Option | Total Monthly Payment | Interest on the New Money | Total Interest, All Debt |
|---|---|---|---|
| Keep 3.5% loan + HELOC | $1,926.87 (draw), then $2,022.56 | ~$115,967 | ~$266,528 |
| Keep 3.5% loan + home equity loan | $2,083.95 | ~$44,775 | ~$195,336 |
| Cash-out refinance at 6.75% | $2,373.87 | n/a (one loan) | ~$488,593 |
The "total interest" column adds the $150,561 of interest left on the 3.5% mortgage to the interest on each equity product. The cash-out refinance looks simple, one payment, but it costs about $290,000 more in interest than keeping the 3.5% loan and adding a home equity loan, plus $6,000 in closing costs. The reason is that the refinance re-prices the existing $300,000 from 3.5% to 6.75% and stretches it over a fresh 30 years.
The HELOC has the lowest payment for the first decade ($425 a month on top of the mortgage), but because you pay only interest for 10 years and then spread the balance over 20 more, it costs far more than the home equity loan in total. If you treat the HELOC like a 15-year loan and pay about $591 a month from the start, its total interest drops to roughly $46,352, nearly matching the home equity loan. Verdict: keep the low-rate mortgage. Choose the home equity loan for a fixed project cost, or a HELOC if you'll spend in stages and pay it down aggressively.
Same home, same $60,000 need, but this time you owe $300,000 at 7.5% with 28 years left, paying $2,138.60 a month. Today's cash-out rate is 6.25%.
| Option | Total Monthly Payment | Total Interest, All Debt |
|---|---|---|
| Keep 7.5% loan + home equity loan (8.25%, 15 yrs) | $2,720.69 | ~$463,346 |
| Cash-out refinance: $366,000 at 6.25%, 30 yrs | $2,253.52 | ~$445,269 (+$6,000 costs) |
Now the cash-out refinance wins on both counts. It lowers the rate on the $300,000 you already owe, so the combined payment is $467.16 a month less than keeping the old loan and adding a second one, and total interest plus closing costs comes in about $12,000 lower even though the term grows by two years. If you kept paying the old $2,720.69 into the new loan, you'd pay it off years early and save much more. Verdict: when the refinance rate beats your current rate, cash-out is often the cheapest way to borrow. Run your own break-even with the refinance calculator and estimate fees with the closing cost calculator.
To compare these options for your home, you need your current home value, mortgage balance, current rate, years remaining, and a quote for each product. Start with the HELOC calculator to see how much you can borrow and what the draw and repayment payments look like, then use the refinance calculator to see whether replacing your first mortgage beats keeping it.
Open the HELOC Calculator →A HELOC is a revolving line of credit with a variable rate. You draw what you need during a draw period, usually 10 years, often paying only interest, then repay the balance over a repayment period.
A home equity loan is a one-time lump sum with a fixed rate and a fixed payment from day one. Both leave your first mortgage in place.
Usually only when you can also lower the rate on your existing mortgage. If your current rate is well below today's rates, replacing the whole loan to get cash raises the cost of every dollar you already owe, and a HELOC or home equity loan is typically cheaper.
HELOCs and home equity loans commonly allow total mortgage debt up to 80% to 90% of the home's value, while conventional cash-out refinances are usually capped at 80%.
On a $500,000 home with a $300,000 mortgage, an 85% cap allows about $125,000 of new borrowing and an 80% cap allows about $100,000.
HELOCs usually cost the least to open, and many lenders waive most fees. Home equity loans range from a few hundred dollars to 2% to 5% of the amount borrowed. A cash-out refinance carries full closing costs on the entire new loan, typically 2% to 6%.
It may be if you itemize and use the money to buy, build, or substantially improve the home securing the loan, subject to IRS limits on total mortgage debt. Money used for other purposes, such as paying off credit cards, generally doesn't qualify. Check current IRS rules or a tax professional.
It usually jumps, because you start repaying principal too. A $60,000 balance at 8.5% costs $425 a month interest-only, then about $521 a month over a 20-year repayment period. If the rate has risen to 10.5%, the repayment payment is about $599.
Yes. All three options are secured by your home, so falling behind can lead to foreclosure, just like your first mortgage. That's why it's risky to use home equity for spending you couldn't otherwise afford.