HELOC vs Cash-Out Refi Calculator 2026
Compare a HELOC (Home Equity Line of Credit — variable rate, second lien, doesn't disturb your first mortgage) against a cash-out refinance (fixed rate, replaces your existing first mortgage with a larger loan) using 2026 market rates. See total interest, monthly payment, and break-even side by side.
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HELOC vs Cash-Out Refi — Structural Differences
A HELOC is a Home Equity Line of Credit: a second-lien loan that creates a revolving credit line against your home equity. You draw cash as needed during a 5-10 year "draw period" and repay during a subsequent 10-20 year "repayment period". HELOCs are variable rate, indexed to Prime Rate plus a margin (e.g., Prime + 0.5%). The first mortgage is untouched. A cash-out refinance replaces your existing first mortgage entirely with a new, larger first mortgage at today's rates. The difference between the new loan and the old balance is paid to you in cash. Cash-out refis are typically fixed rate for the full 15-30 year term. Per CFPB consumer education, the structural difference makes them suit different scenarios. Last updated May 2026.
When HELOC Beats Cash-Out Refi
HELOC is the right answer when: (1) your existing mortgage rate is well below current rates (e.g., your 3.5% mortgage vs today's 7% cash-out rate) — a refi would force you to give up your low first-lien rate on the entire balance; (2) you need flexible access to funds over time (renovation projects, business cash flow) rather than a lump sum; (3) you expect to pay off the borrowed amount within 3-7 years; (4) you're rate-bullish and expect Prime Rate to fall during the borrowing period. Per Federal Reserve historical data, HELOC rates closely track the Fed Funds rate — when rates are at cyclical highs (as in 2026), HELOCs are expensive but expected to fall.
When Cash-Out Refi Wins
Cash-out refi is the better choice when: (1) your current mortgage rate is at or above today's rates (refi may not raise your payment much); (2) you want a fixed, predictable monthly payment with no rate risk; (3) you need a large lump sum (above $100k) with a long repayment horizon; (4) you can lock in closing costs in the loan amount without disturbing cash savings; (5) you expect to stay in the home for the long term, spreading closing costs over many years. Per Fannie Mae Selling Guide, the maximum cash-out LTV is 80% — your home value must be at least 1.25× the new loan amount.
Tax Deductibility Difference
Both HELOC and cash-out refi interest are deductible only if used to "buy, build, or substantially improve" the home that secures the loan, per IRS Publication 936 post-TCJA rules. Interest on funds used for personal expenses (debt consolidation, vehicles, vacations) is NOT deductible. The deduction is capped at $750,000 total acquisition debt (down from $1M pre-TCJA). When the funds are used for substantial home improvements, both products produce identical tax treatment — neither has an inherent tax advantage. Total combined first-lien plus HELOC must stay within the $750k acquisition debt cap to deduct all interest. Source: CFPB, Fannie Mae Selling Guide 2026, IRS Publication 936, Freddie Mac Primary Mortgage Market Survey.
Frequently Asked Questions
Which is cheaper — HELOC or cash-out refi in 2026?
Depends entirely on your existing mortgage rate and payoff timeline. If your current first mortgage is below 5%, HELOC almost always wins on total cost — you keep the low first-lien rate. If your current rate is 6%+ already, cash-out refi at ~7% may be cheaper long-term.
Is HELOC interest fixed or variable?
Variable — HELOCs are typically priced as Prime Rate + a margin (e.g., Prime + 0.5%). In 2026, Prime is around 7.5%, putting HELOC rates around 8-9.5%. Some lenders offer fixed-rate conversion options for portions of the balance.
Can I deduct interest on a HELOC or cash-out refi?
Only if you use the funds to buy, build, or substantially improve the home securing the loan. Funds used for debt consolidation, vacations, or unrelated purposes are NOT deductible. Total acquisition debt cap is $750,000 (post-TCJA). Same rule applies to both HELOC and cash-out refi.
How much equity do I need to qualify?
For a HELOC: most lenders allow up to 80-85% combined loan-to-value (CLTV), some specialty lenders go to 90%. For cash-out refi: 80% LTV is the conventional/FHA cap; VA cash-out goes to 100% for eligible veterans. You need significant equity for either.
What is the draw period vs repayment period on a HELOC?
Draw period (typically 5-10 years): you can borrow and repay flexibly, often paying interest-only. Repayment period (typically 10-20 years after draw): no more draws, you pay principal + interest until paid off. The shift from draw to repayment often causes payment shock.
Why do cash-out refi closing costs matter more than HELOC?
Cash-out refi closing costs are typically 2-5% of the new loan amount ($6,000-$15,000+). HELOCs often have $0-$1,500 closing costs because they're second-lien products with less paperwork. The closing cost difference can be $10k+, which matters if you'll pay off the debt quickly.