HELOCs vs Refinances in this rate market

9/14/20235 min read

Homeownership comes with a unique set of financial opportunities and challenges. It becomes even more difficult in a higher rate environment than we have seen in previous years. Coming out of a global pandemic and economic volatility has put us in a plethora of micro and macro financial worries. Individually, some have turned to using credit cards to absorb the loss of an income or a side hustle to help pay for unexpected home and auto maintenance. Its hard to navigate your best option. For homeowners, you have another source of funds to turn to instead of credit cards and/or retirement savings. Among them, tapping into your home's equity to access funds is a decision that requires careful consideration.

The most popular options for homeowners looking to leverage their home equity are Cash Out Refinancing and Home Equity Lines of Credit (HELOCs). Both options have their merits and drawbacks, and understanding them is crucial to making an informed financial decision. I'll give you a quick rundown of the pros and cons to each to help you choose the one that best suits your needs.

Cash Out Refinancing

Cash Out refinancing is a simple calculation if you can bare withYou currently have a mortgage with the bank that you have been paying off over the years. At this moment, you are at a higher percentage of ownership than when you bought it because of two reasons. 1. you have been paying the bank back the loan they gave you to purchase it, and 2. your home has naturally appreciated in value since you bought it, giving you a boost in the percentage of ownership. Lets use round, simple numbers as an example:

You bought a house in 2015 for $200,000.

Your down payment was 3% ($6,000). The loan balance is $194,000.

So, when you bought your home, the bank essentially "owned" 97% ($194,000) and you owned 3% (in reality, you own 100% of your house, and have a loan with the bank using your home as the collateral, they dont own it, but thats another blog post for another day).

Fast forward to 2023, and you have been paying the bank every month for 8 years. Now, your loan balance is about $175,000. Your home is also valued higher than in 2015 because of the market, inflation, and natural home appreciations. You have it appraised and an appraiser says the value is now $270,000 (roughly 4% increase yearly).

So, your percentage of ownership started at 3% 8 years ago, is now at 36% in 2023! This is simply by paying your mortgage every month. Here is where Cash Out Refinancing comes in. You give me a call and apply for a refinance and ask me to "reset" your mortgage at a higher loan balance above its current balance so you can use that cash to pay off credit card debt and redo your hallway bathroom. Most banks make you keep 10% ownership and don't let you go all the way back down to 3%. The simple math; 10% of 270,000 is $27,000. The new mortgage would be at $243,000 ($270,000 - $27,000). Then at closing the bank will pay off your old mortgage (175,000) and you are left with $68,000 to redo a bathroom and pay off all your credit card debt. Your new mortgage could be for 30 years again if you wanted lower payments or 20 years if you wanted to keep the same track you were on, however, it will make your payments higher because your loan will be larger and the time to pay it off would be shorter.


  1. Lump Sum Access: Cash out refinancing allows homeowners to access a substantial lump sum of money, which can be used for various purposes such as debt consolidation, home improvements, or major expenses like education or medical bills.

  2. Potentially Lower Interest Rates: In comparison to HELOCs, refinancing provides you a lower, fixed rate. Currently, mortgage rates will not be lower than your current mortgage

  3. Tax Deductibility: In some cases, the interest paid on a cash-out refinance may be tax-deductible, making it a potentially tax-efficient way to access funds.


  1. Higher Closing Costs: Cash out refinancing typically involves higher closing costs compared to other loan options. These costs can eat into your overall savings, especially if you plan to sell your home in the near future.

  2. Extended Loan Term: By refinancing your mortgage, you may extend the term of your loan, potentially leading to more interest payments over the life of the loan.

  3. Risk of Foreclosure: Accessing a large sum of money through a cash-out refinance can increase the risk of defaulting on your mortgage if you're unable to manage the additional debt responsibly.

Home Equity Lines of Credit (HELOCs)

Home Equity lines of Credit are similar to refinancing and you are still pulling out a percentage of your ownership, however, you are not replacing your current mortgage. It is in addition to it. Think of a HELOC as essentially a giant credit card. The max balance is much higher than any credit card will offer, because you are using your home as the collateral, if you don't pay. Also, they do not have a 'fixed' monthly payment like a mortgage because you can pay all or some of the balance at anytime. Just like a credit card. You can pay the minium payment each month, or you can pay down the whole balance. Same with a HELOC. The interest rate on lines of credit are not fixed either, because the usage is openended, it goes off of current PRIME rates to factor the monthly minimum interest payment.


  1. Flexibility: HELOCs offer greater flexibility in accessing funds. You can borrow as much or as little as you need, up to your credit limit, and pay interest only on the amount you use.

  2. Lower Initial Costs: HELOCs typically have lower upfront costs compared to cash out refinancing, which can make them a more cost-effective option for short-term borrowing needs.

  3. Interest-Only Payments: During the draw period of a HELOC (typically 5-10 years), you are only required to make interest payments, providing temporary relief from principal payments.


  1. Variable Interest Rates: Most HELOCs come with variable interest rates, which can lead to unpredictable monthly payments as interest rates fluctuate.

  2. Potential for Overspending: The ease of accessing funds through a HELOC can tempt homeowners into overspending and accumulating more debt than they can handle.

  3. Balloon Payments: At the end of the initial draw period (usually 5 years), HELOCs often require a balloon payment of the remaining balance, which can be a significant financial burden if not planned for in advance. They can also be extended into fixed loan payments like a mortgage for 10-20 years.

Both options offer opportunities to access your home equity for various purposes, but they come with their own set of advantages and disadvantages. Before making a decision, consult with a financial advisor or mortgage professional like myself to ensure that your choice aligns with your long-term financial objectives and fits your current financial situation. Remember, the right option for one homeowner may not be suitable for another, so take the time to evaluate your unique circumstances and make the choice that best serves your needs.