Comparing mortgage refinance vs. HELOC

When looking to refinance your home, homeowners can choose from many options, like home equity loans, cash-out refinance, and a home equity line of credit (HELOC). When comparing a mortgage refinance vs. a HELOC, borrowers will find similarities and differences to help choose the one that’s right for them.

While a traditional mortgage refinance changes the terms and rates of your existing mortgage, a cash-out refinance pays off your original mortgage and allows you to withdraw additional funds through a new mortgage loan. This additional borrowing mimics a HELOC but, instead of a line of credit, a cash-out refinance offers you a lump sum when borrowing.

If you’re looking to consolidate debt or have a home renovation project in mind, Discover® Cash-Out Refinance may be the best option for your financial situation when compared with a HELOC.

Curious how much you can borrow using your home’s equity? Use Loan Amount Calculator from Discover to get an estimate.

HELOC: A loan that acts as a second mortgage

A home equity line of credit, or HELOC, generally acts as a second mortgage on your home. It’s a credit line secured by your home’s value, which means you may have two bills to pay: your original mortgage and the HELOC’s monthly payments.

One key difference between a HELOC and a home equity loan is that you don’t get a lump sum of cash with a HELOC. A HELOC gives you access to a predetermined credit limit to draw from over a fixed period of time (10 years is a common draw period). During the draw period, some lenders may allow you to make interest-only payments.

Once the draw period ends, you can no longer request funds and are required to pay the outstanding balance over the remaining repayment term of the loan.

Another key difference is that HELOCs typically have a variable interest rate that can increase or decrease over time, depending on national economic conditions beyond your control.

By contrast, a Discover home equity loan provides all funds upfront in a lump sum and comes with a fixed interest rate and monthly payment that will never change for the life of the loan. Discover offers home equity loans and mortgage refinances, but does not offer HELOCs as a home equity financing product.

Cash-out refinance: A refinanced mortgage that includes a loan

A cash-out refinance is a refinanced mortgage that includes a loan for the borrower to use as they wish, such as for debt consolidation, home improvement, starting a college fund, or making a large purchase.

In a cash-out refinance, the borrower takes out a new mortgage for more than they currently owe, pays off their existing mortgage with the new loan, and keeps the difference for their own use.

Note the main differences between a cash-out refinance and a HELOC. A cash-out refinance allows the borrower to retain just one mortgage bill per month. The borrower also gets a lump sum of cash compared to the predetermined credit limit of a HELOC.

Want to see if a cash-out refinance is the best option for you? Learn how much cash you may be able to get using your home’s equity with the Discover Cash-Out Refinance Calculator. The calculator can also provide an estimated mortgage rate you may have after refinancing.

Similarities between a cash-out refinance and HELOC

There are just a few similarities between a cash-out refinance and HELOC.

• Borrow Against Your Home’s Equity: Both a HELOC and a cash-out refinance allow you to borrow funds using a portion of your home’s equity. The borrower can use these funds for a variety of reasons, like debt consolidation, home improvement, helping with educational expenses, or making a large purchase.
• Collateral: Because both options borrow against your home’s equity, your property is used as collateral for the loan. If payment obligations aren’t met, the lender would have the right to take ownership of your home to recoup their losses.

Differences between a cash-out refinance and HELOC

While HELOCs and cash-out refinancing are both financing options that take advantage of your available equity, there are many differences between them:

• Lump-Sum vs. Credit Line: With a cash-out refinance, the borrower receives a lump sum of cash they use to pay off their existing mortgage, with the remaining cash to use as they like. A HELOC provides a line of credit the borrower can draw from during a predetermined draw period. The borrower can draw as much or as little as they want at a time, where some lenders include a fee for each withdrawal.
• Fixed vs. Variable Interest Rates: A cash-out refinance offers fixed interest rates. This allows for a stable monthly payment at a set rate for the entire life of the loan. HELOCs feature variable interest rates that can increase or decrease over the term of the loan, depending on national economic conditions. This means monthly payments can fluctuate from month to month.
• One Monthly Payment vs. Two: A cash-out refinance is a loan that’s larger than your current mortgage. You use the new loan to pay off your current mortgage and keep the difference for your needs. As a result, you have just one monthly mortgage payment as you did before. A HELOC will add a second payment per month along with your existing mortgage, also meaning that your HELOC places a second lien on the property.
• Repayment Periods: A cash-out refinance, similar to a mortgage, starts repayment of your loan shortly after you receive your lump sum cash and includes steady monthly payments until the loan is repaid. A HELOC includes two separate periods: a withdrawal period, during which you can take funds from your line of credit (where some lenders allow you to pay only interest against your borrowed amount) and a repayment period, where you will begin paying back both the principal and the interest remaining on the HELOC. This setup for repaying your HELOC can mean vastly different monthly payments during these two different periods.

Explore the best home equity borrowing option for you

When looking for a mortgage refinance, it’s always best to research lender rates and terms to find the best home equity borrowing option for you. You’ll want to know what your interest rate will be and if it’s fixed or variable, how much you can borrow, and what your monthly payment could be after refinancing.

Discover offers free tools to help you make the best financial decision for your situation.

• Discover Loan Amount Calculator: Do you have a budget in mind for making those home renovations or for another expense? Loan Amount Calculator by Discover tells you the maximum you may be eligible to borrow.
• Discover Cash-Out Refinance Calculator: If you’re unsure how much cash your home’s equity could provide, use Cash-Out Refinance Calculator by Discover to receive an estimate of how much you may be able to get.
• Discover Debt Consolidation Calculator: Are you wondering if debt consolidation could save you money? Debt Consolidation Calculator from Discover provides an estimate for how much you might be able to save by combining debts into one low-interest monthly payment.