What is the difference between a HELOC and a cash-out refinance?

A cash-out refinance replaces your entire first mortgage with a larger new loan and pays you the difference in cash. A HELOC is a second lien: your existing mortgage stays, and you borrow a revolving line against leftover equity. Closing costs on a cash-out are typically 2–5% of the new loan; HELOC costs are often $0–$500.

Is HELOC interest tax deductible in 2026?

Only if the money is used to buy, build, or substantially improve the same home that secures the loan, and only on combined acquisition debt up to $750,000 ($375,000 married filing separately). Paying off credit cards, a car, tuition, or a wedding with a HELOC does not make the interest deductible. The product label does not matter — tracing the proceeds does. IRS Publication 936.

When does a cash-out refinance beat a HELOC?

When the new first-lien rate is lower than the rate you already have, you will keep the house past the closing-cost break-even, and you want one payment and a fixed rate on the whole balance. If your current mortgage is still in the 3% range, cash-out almost never wins — you would be rewriting the cheap loan at today’s rate just to pull a slice of equity.

How much equity do I need for a HELOC or cash-out?

Most conventional programs cap combined loan-to-value around 80–90%. On a $450,000 house with $280,000 owed, $50,000 of extra debt is about 73% CLTV — usually fine. Crossing 80% on a cash-out often reintroduces PMI. Lenders also underwrite DTI on the new payment. Run the DTI calculator with the extra line.

Does a cash-out refinance replace my current mortgage rate?

Yes. That is the feature people with 2020–2021 mortgages miss. Every dollar of the old balance is re-priced at the new rate, not just the cash you take out. A HELOC prices only the new dollars.

Home · Learn · HELOC vs cash-out

Housing · Debt · Taxes

HELOC vs cash-out refinance: the decision is whether you keep the first lien

Both products turn home equity into cash. They are not interchangeable. A cash-out refinance tears up the mortgage you have and writes a bigger one. A HELOC (or a fixed home-equity loan) sits in second position and leaves the first lien alone. If that first lien is 3.25%, the second option is the whole thesis. The refinance break-even calculator assumes you are replacing the loan on purpose. This page is for when you might not want to.

Updated 2026-09-08 · 11 min read · Educational, not lending or tax advice. Run the HELOC vs cash-out calculator with your balance, current rate, and cash need.

Two products, three numbers

Ignore the monthly payment until you have written these down:

The rate on the loan you already have. That is the rate a cash-out destroys.
How many dollars you actually need, and for how long. A $20,000 kitchen over eight months is a HELOC draw. A $180,000 second-lot purchase is a different conversation.
What the money is for. That decides 2026 interest deductibility, not whether the lender called it a HELOC.

	HELOC	Cash-out refinance
What happens to the first mortgage	Stays. Same rate, same payment, same term.	Paid off. New rate on the entire new balance.
Rate on the new dollars	Usually variable (prime + margin). A fixed HELOAN is the cousin.	Fixed (or ARM) on the whole loan, typically a bit above a rate-and-term refi.
Closing costs	Often $0–$500. Some lenders recoup if you close the line in year one.	Typically 2–5% of the new loan — not of the cash extracted.
Payments	Two: existing P&I plus interest (often interest-only in the draw period).	One new P&I, usually reset to 30 years.
When it wins	You have a cheap first lien, a modest cash need, or a short project.	The new rate beats the old one, you want one payment, and you will stay past break-even.

Worked slice

$280k at 3.25%, pull $50k

Keep the 3.25% loan (~$1,360 P&I on 25 years left) and add HELOC interest-only on $50k at 8.25% (~$340). Combined ~$1,700. Cash-out $338k at 6.5% for 30 years is ~$2,140 — and you just re-priced $280k of cheap debt.

Flip the rates

Old loan at 6.8%, cash-out at 6.1%

Now cash-out is a rate-and-term refinance that happens to spit out cash. Run the break-even on the whole new loan, not just the $50k. Closing costs sit on $330k+, not on the kitchen.

The 2026 tax rule is tracing, not the product name

Interest on a loan secured by your home is deductible only as acquisition indebtedness: money used to buy, build, or substantially improve that same home. Combined cap for loans after December 15, 2017 is $750,000 ($375,000 married filing separately). The 2025 tax package kept that cap in force for 2026; it did not bring back the old $100,000 “home-equity indebtedness” bucket for credit-card payoffs.

Deductible (if you itemize, and under the cap): kitchen, roof, addition, finishing the basement — on the house that secures the loan.
Not deductible: consolidating 22% cards, a car, tuition, a wedding, buying a different property, investing the proceeds.
Cash-out is the same test, split: the slice that replaces the old acquisition balance stays acquisition debt. The extra cash is acquisition debt only if you spend it on that house. Refinancing a grandfathered pre-2017 loan keeps the $1 million cap only up to the balance being refinanced — cash above that is new $750k-cap debt.

Most households take the 2026 standard deduction ($16,100 single / $32,200 joint / $24,150 HOH) and deduct $0 of mortgage interest either way. Do not pick a product for a write-off you will not use. Confirm Publication 936 and whether you actually itemize.

CLTV, PMI, and DTI — the three ways the file dies

Combined loan-to-value = (first lien + new HELOC or cash-out) ÷ current value. Conventional cash-out often wants ≤ 80%. HELOC programs go to 80–90% depending on score and occupancy. Crossing 80% on a cash-out can put PMI back on a loan that had already dropped it — see how PMI ends.

Underwriters do not care that “it is my house.” They care about back-end DTI on the new payment. A HELOC interest-only draw looks cheaper on paper than a 30-year amortizing cash-out; the repayment period later is not cheaper. Plug the harsher payment into the DTI calculator.

Variable-rate shock is part of the HELOC quote

Prime moves. A HELOC at prime + 0.5% that looks like 8.25% today is 10.25% if prime jumps 2 points, and the payment on interest-only dollars moves the same day. The calculator prints that +2% line. If that version wrecks the budget, you wanted a fixed home-equity loan (HELOAN) or you wanted to wait. Do not use a HELOC as a checking account. The draw period (often 10 years) is a project window, not a lifestyle.

Closing costs are a percent of the wrong number

People compare “$7,500 to cash-out vs $0 to HELOC” and stop. The honest unit is cost per dollar extracted. $7,500 to pull $50,000 is 15% day-one friction. $7,500 to pull $50,000 and cut the rate on a $400,000 balance is a refinance that happens to include cash — price it as a refinance. Rolling costs into the new loan does not make them free; you pay interest on them for years. Same rule as the break-even guide.

Order of operations before you apply

Write the current rate, remaining term, and payoff. If the rate is still a 2020–2021 souvenir, start at HELOC/HELOAN.
Name the use of funds in one sentence. If it is not “improve this house,” assume the interest is not deductible.
Size the cash you will actually spend in 12 months, not the credit limit the lender will pitch.
Run both paths for the years you will keep the house, including a HELOC +2% shock and cash-out PMI if LTV crosses 80%.
Check DTI and an emergency-fund floor. Tapping equity to refill a $0 HYSA is how a job-loss becomes a foreclosure. See emergency fund sizing.

A recast (lump-sum principal, same rate, lower payment, small fee) is the move when you have cash to put in, not take out. Do not confuse it with a cash-out.

Related decisions

Qualify first with DTI and how much house. Rate-and-term without cash is refi vs extra principal. Paying the house down vs investing is the premium extra-vs-invest playbook.

Free tool

HELOC vs cash-out calculator

Keep-the-lien vs replace-the-lien, 5-year cash paid, remaining debt, CLTV, +2% HELOC shock, shareable URL.

PayPal

Tap equity without lighting the 3% loan

Use-of-funds test, CLTV file, which quote to ask for, when a recast beats both.

Not tax, legal, or lending advice. Confirm Publication 936, your loan estimate, and a licensed professional. Premium restore: /account.