HELOC vs. Home Equity Loan vs. Cash-Out Refinance: Cost Comparison on $50,000

How Each Works

A HELOC is a revolving line of credit with a variable rate, usually with an interest-only draw period of about 10 years and then a repayment period. You borrow as needed and pay interest only on what you use. A home equity loan is a second mortgage paid out as a lump sum with a fixed rate and fixed payments over 5 to 30 years. A cash-out refinance replaces your first mortgage with a new, larger one and gives you the difference in cash, at the new mortgage rate.

In all three, your home is collateral. Failing to repay can lead to foreclosure.

The Numbers on $50,000

Assume a HELOC at 8%, a home equity loan at 8% fixed, and a cash-out refinance in which the extra $50,000 is added to a mortgage at 6.75% for 30 years. On a HELOC, interest-only payments are $50,000 × 0.08 ÷ 12 = $333 a month, and nothing reduces principal during the draw period. On a 15-year home equity loan at 8%, the payment is $477.83 and the total interest is $36,010. On a 10-year loan, the payment is $606.64 with interest of $22,797.

On the cash-out refinance, the additional payment on $50,000 at 6.75% for 30 years is $324.30 a month. The monthly payment is lowest, but total interest on that slice is $66,748 over 30 years, since the debt is stretched, and you would also pay closing costs on the whole loan, plus a higher rate on the entire balance if rates have risen since your original loan.

Closing Costs and Flexibility

Home equity loans and HELOCs usually have lower closing costs than a refinance, and some lenders waive fees. A cash-out refinance has full mortgage closing costs, commonly 2% to 5% of the new loan balance. A HELOC offers flexibility but exposes you to variable rates, as well as the temptation to borrow more than you planned. A fixed home equity loan provides certainty about the payment.

If your current mortgage has a very low rate, as many do, replacing it with a cash-out refinance at a higher rate raises the cost of your entire balance, not just the new money. In that case, a second loan is usually cheaper.

Choosing the Right Option

Use a HELOC for ongoing or uncertain expenses, like a phased renovation, if you can handle variable-rate risk. Use a fixed home equity loan for a one-time expense when you want predictable payments. Consider cash-out refinancing when you can also lower your existing rate or need a large sum. Keep total borrowing well below the home's value, because a decline in prices could leave you owing more than the home is worth. Lenders commonly cap combined borrowing at 80% to 85% of value.

Alternatives and Cautions

For smaller or shorter-term needs, a personal loan, saving first, or negotiating payment plans might avoid putting your house at risk. Using home equity to pay for vacations or everyday spending turns unsecured debt into secured debt. Interest may be tax deductible only if the funds are used to buy, build, or substantially improve the home, subject to current tax rules, so consult a tax adviser.