Cash-Out Refinance vs HELOC: How to Calculate the True Cost of Each

The Core Question Is Not Which Rate Is Lower

Rate comparisons mislead homeowners every day. A HELOC at 8.5% looks worse than a cash-out refinance at 7.1% until you account for the $12,000 in closing costs on the refi. If you repay the funds in three years, the HELOC wins by a wide margin. If you hold 15 years, the refi likely wins. The decision lives entirely in your specific numbers.

Two variables dominate the calculation: how much you borrow and how long you carry the balance. Everything else is secondary.

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How a Cash-Out Refinance Works Financially

A cash-out refinance replaces your existing mortgage with a new, larger loan. You receive the difference in cash at closing. The lender underwrites the full new balance, not just the equity portion you are extracting.

What You Actually Pay

Closing costs on a cash-out refinance typically run between 2% and 5% of the new loan amount. On a $350,000 new loan balance, that is $7,000 to $17,500 paid at closing or rolled into the loan. Rolling those costs into the loan eliminates the upfront hit but increases your principal and the interest you pay on it for the life of the loan.

The rate you receive on a cash-out refinance is fixed for the loan term in most cases. That predictability has real value when rates are expected to rise.

When the Fixed Structure Works Against You

If your current mortgage carries a rate below 5% and market rates sit above 7%, a cash-out refinance reprices your entire loan balance at the higher rate. On a $400,000 existing balance, moving from 3.5% to 7.25% adds approximately $1,500 per month to your payment. That is $18,000 per year in additional interest cost on the portion of the loan you already had, before counting the equity you pulled out.

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How a HELOC Works Financially

A HELOC is a revolving credit line secured by your home equity. The lender sets a credit limit, typically up to 85% of your home's appraised value minus your existing mortgage balance. You draw against that limit as needed during a draw period, usually 10 years. After the draw period, you enter repayment, typically 20 years.

The Variable Rate Problem

Most HELOCs carry variable rates tied to the prime rate. As of early 2026, prime sits at 7.5%. HELOC rates typically run at prime plus a margin of 0.5% to 2%, putting the effective rate between 8% and 9.5% for well-qualified borrowers.

That rate resets as prime moves. Between 2022 and 2023, prime rose 5.25 percentage points in 18 months. A borrower who opened a HELOC at prime minus 0.5% in early 2022, expecting to pay around 2.75%, watched that rate climb to 7.25% by mid-2023. On a $100,000 HELOC balance, that shift added $4,500 per year in interest.

Interest-Only Draw Periods Distort Your View

During the draw period, most HELOCs require only interest payments. A $100,000 HELOC balance at 8.75% costs $729 per month in interest-only payments. That looks manageable. When the draw period ends and the full principal amortizes over 20 years, that payment jumps to $885 per month, and you have made zero progress on the principal.

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Worked Example 1: The Renovation with a Clear Payoff Date

Scenario: A homeowner wants $80,000 for a kitchen renovation. Existing mortgage: $320,000 at 3.75% with 22 years remaining. Home value: $600,000. She plans to sell in 5 years.

Cash-Out Refinance Option:

• New loan balance: $400,000 at 7.1% for 30 years
• Monthly payment: $2,686 vs current $1,607, a difference of $1,079 per month
• Closing costs: $10,000 (2.5% of new balance)
• Total cost over 5 years: $64,740 in additional payments plus $10,000 closing costs = $74,740
• Principal paydown on the new loan in 5 years: approximately $22,000

Net cost of accessing $80,000: approximately $52,740 over 5 years.

HELOC Option:

• $80,000 at 8.75% (prime + 1.25%), interest-only during draw period
• Monthly interest payment: $583
• Total interest over 5 years: $34,980
• Closing costs: $500 to $1,000 in typical HELOC origination fees

Net cost of accessing $80,000: approximately $35,500 to $36,000 over 5 years.

Verdict: The HELOC saves this borrower approximately $17,000 over her 5-year horizon. Repricing a $320,000 existing balance from 3.75% to 7.1% makes the cash-out refi prohibitively expensive for a short-term need.

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Worked Example 2: Long-Term Hold with Rate Risk

Scenario: A different homeowner wants $120,000 to buy an investment property. Existing mortgage: $250,000 at 6.9% with 28 years remaining. Home value: $550,000. He plans to hold the primary residence for at least 20 years and wants the cash for the full duration.

Cash-Out Refinance Option:

• New loan balance: $370,000 at 7.25% for 30 years
• Monthly payment: $2,525 vs current $1,658, a difference of $867 per month
• Closing costs: $9,250 (2.5% of new balance)
• Total interest paid over 20 years: approximately $381,000 on the new loan

HELOC Option:

• $120,000 at 8.75%, with a reasonable assumption that rates average 9.25% over 20 years given historical rate cycles
• Interest-only for 10 years: $925 per month = $111,000 in interest
• Amortizing repayment for 10 years at 9.25%: approximately $1,130 per month = $135,600 in payments with a portion reducing principal
• Total HELOC cost over 20 years: approximately $246,600, plus the principal still owed at year 10

When you account for total interest plus the fact that the HELOC principal does not reduce during the draw period, the 20-year all-in cost of the HELOC exceeds $300,000 on a $120,000 balance. The cash-out refi, despite the rate nearly matching, wins on this long horizon because the fixed payment structure forces amortization from day one.

Verdict: The cash-out refinance saves approximately $30,000 to $50,000 in total cost over 20 years. The rate differential matters less than the repayment structure across a long holding period.

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The Factors Most Calculators Miss

Blended Rate on the Existing Balance

When evaluating a cash-out refi, compute your blended rate across the full new balance. Take the weighted average of your existing rate on the current balance and the market rate on the equity you are pulling. That number, compared to the HELOC rate, is the accurate cost comparison.

Tax Deductibility

Interest on home equity debt, including both HELOCs and cash-out refinances, is deductible only when used to buy, build, or substantially improve the home securing the loan. Using either product for debt consolidation or a vacation eliminates the deduction. Confirm with your tax advisor before building deductibility into your cost calculation.

Break-Even on Closing Costs

On a cash-out refinance, divide total closing costs by your monthly savings versus the HELOC payment. If closing costs are $11,000 and the refi saves you $220 per month versus the HELOC, your break-even is 50 months. If you sell or pay off the loan before month 50, the HELOC was cheaper regardless of rate.

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How to Run the Calculation Correctly

The sequence that produces an accurate comparison:

1. State your existing loan balance and rate precisely.
2. Define your borrowing amount and your realistic repayment horizon.
3. Calculate the cash-out refi blended rate across the full new balance.
4. Project HELOC costs under a base rate scenario and a rate-plus-2% stress scenario.
5. Compare total interest paid, including closing costs, over your specific timeline.
6. Identify the break-even point.

That process takes the decision out of the realm of guesswork and puts a specific dollar figure on each option.

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Run Your Numbers Before You Commit

The difference between the right and wrong choice here is not marginal. As the examples above show, the spread can exceed $50,000 over a realistic holding period. That spread is entirely a function of your specific loan size, rate environment, and timeline.

The CalcMoney mortgage calculator models both options side by side using your actual inputs. Enter your current balance, the equity you want to access, your expected holding period, and current market rates. The calculator outputs total cost of borrowing for each structure, the break-even month, and the monthly payment difference across the full loan term.

Calculate your cash-out refinance vs HELOC cost now →

You Might Also Like

• How to Calculate Your Cash-Out Refinance Amount (With Real Numbers)
• How to Calculate a HELOC Interest-Only Payment (With Real Numbers)
• How to Calculate Rate-and-Term Refinance Savings (With Real Numbers)

The numbers will tell you which option wins. They almost never agree with the initial rate comparison.