Cash out refinance vs. HELOC

Please note: Discover® Home Loans offers cash out refinances and home equity loans, but does not offer HELOCs.

If you’re looking to borrow money using the equity in your home, you might consider a home equity line of credit (HELOC) or cash out refinance. These are both popular loan options for accessing funds that you can use for home renovations, debt consolidation, or major purchases.

Which solution is best for your financial needs? You can use this comparison chart to weigh the options between a HELOC vs. cash out refinance.

Pros & cons of HELOC

Some of the biggest benefits of HELOCs include:

• Possibly higher credit limits, tapping into a high percentage of your home equity.
• Flexible loan amounts, since you can use some or all of your credit limit based on your ongoing needs.
• Lower or no closing costs, since you’re not refinancing your whole mortgage.

Meanwhile, HELOCs also come with disadvantages, such as:

• Typically have variable interest rates, which can lead to fluctuating, and unpredictable monthly payments.
• Possible requirements for withdrawal minimums, which lenders may set to ensure you borrow a certain amount of funds within the withdrawal period.
• Possible additional fees, such as origination fees and annual fees.

When to get a HELOC

Homeowners might use a HELOC to fund a renovation or tap into a revolving credit line for ongoing home improvement projects. They also might open a HELOC to have quick access to funds in case of emergencies.

Since HELOCs can be flexible, it also means there are some situations in which they may be better for homeowners than a cash out refinance. For example, borrowers also might use them if they don’t want to commit to a certain loan amount or don’t know how much money they’ll specifically need over the typical draw period of 5 to 10 years. They also may be interested in using them to handle increasing costs and inflation for certain projects over time.

Still, HELOCs may have variable interest rates, which can leave borrowers with unpredictably high monthly payments if rates move up. Fixed rate options such as home equity loans or cash out refinances replace a HELOC’s flexible borrowing with a lump sum amount, so you should know what your monthly payment will be and may be able to plan ahead for your financial goals.

Cash out refinance pros & cons

The biggest advantages of cash out refinancing include:

• The possibility of lowering your interest rate since you’re creating an entirely new mortgage for your home.
• Typically fixed interest rates, which allow for steadier and more predictable monthly payments.
• Streamlining your finances, since you’ll only have one mortgage payment to make instead of two, as with a HELOC.
  

Cash out refinancing also has its downsides, such as:

• Possible closing costs, which may be higher than those of HELOCs as you go through the process of redoing your first mortgage.
• Lack of flexibility, since you may have to identify the entire amount of money you’ll need up front.

When to get a cash out refinance

Cash out refinancing can be a great option for borrowers who want to fund renovation projects with clearly projected costs or use their home equity to consolidate debt. Cash out refinancing can also be a helpful solution for people who have a higher rate mortgage and want to take advantage of lower market interest rates by redoing their mortgage.

HELOC and cash out refinance APRs in 2025

Both HELOC and cash out refinance annual percentage rates (APR) can be affected by current interest rates in different ways. These effects may actually influence how much money you may save on a monthly payment for either financing option, so it’s important to understand them when applying.

Cash out refinance interest rates

Since cash out refinances are typically fixed, their APRs are set upon closing the refinance. This means that whatever the interest rates are at the time of closing will have a direct effect on your refinance’s monthly payments. 

Current interest rate forecasts in 2025 are for a slight decrease in rates, ending the year around 6.4% APR or 6.5% APR. If this is a significant enough decrease for you to have substantial savings on your monthly payments, then it may be time to consider a cash out refinance.

HELOC interest rates

However, if you’ve already determined that a HELOC is right for you, you may have to pay attention to interest rates whenever you make withdrawals.

Since a HELOC typically comes with a variable interest rate, your monthly payment amounts may change regularly based on the current state of the market and interest rates. You may want to consider forecasts for interest rates for planned expenses before making a withdrawal.

Alternatives to HELOCs and cash out refinance

A home equity loan is a common alternative to HELOCs or cash out refinancing. Like a cash out refinance, a home equity loan lets you take out a lump sum of cash, which you then pay back in monthly installments.

Compared to HELOCs, home equity loans may also offer fixed rates for more stable and affordable monthly payments.

While personal loans and credit cards offer borrowing opportunities, they are also unsecured loans, meaning you don’t need to put up collateral to obtain them. This means ou may encounter higher interest rates and lower borrowing limits with credit cards and personal loans than comparable home equity financing options.