COMPARISON · CASH-OUT REFI · MAY 2026

Three Ways to Tap Equity, Compared on Cost and Risk

A HELOC, a home equity loan, and a cash-out refinance are three distinct instruments for converting home equity into spendable cash. The right choice depends almost entirely on the relationship between your existing mortgage rate and current cash-out refi rates, the size of the cash need relative to total mortgage balance, and your tolerance for resetting the amortisation clock. This page builds a three-way cost model under May 2026 rate conditions, lays out the closing-cost stack for each, and gives a decision matrix at the end.

The 2026 Rate Backdrop

The Freddie Mac Primary Mortgage Market Survey (PMMS) shows 30-year fixed conforming rates in the high 6 to mid 7 percent range across May 2026, having drifted down from the 7.5 to 8 percent peak of late 2023. Cash-out refi pricing carries an LLPA stack per FHFA matrices that adds typically 25 to 75 basis points to the advertised rate. In current conditions, a representative cash-out 30-year fixed is in the 7.2 to 7.8 percent range for strong credit and 75 percent LTV.

HELOC rates per Fed H.15 (prime 7.25 percent) plus typical 1.5 to 3 percent margins land in the 8.75 to 10.25 percent band. HEL fixed rates for 10-year terms and prime credit run roughly 8 to 9.5 percent. So on a rate basis alone, cash-out refi is cheaper than HELOC or HEL in current conditions. But the rate is only one variable. The dominant variable is the rate of your existing mortgage.

Roughly 60 percent of US mortgages outstanding have rates below 4 percent according to FHFA mortgage data and various tracking services. For these borrowers, a cash-out refinance means giving up a sub-4 rate on the entire mortgage balance to take out a relatively small amount of cash. The math is rarely close.

Worked Example: 300k Mortgage at 3.5 Percent, Need 50k Cash

Take a representative homeowner with a 300,000 dollar balance at 3.5 percent (a 2020-vintage 30-year), 24 years remaining, monthly P+I of 1,347 dollars. Home value 500,000 dollars; 200,000 dollars of equity. Need 50,000 dollars cash for a roof and HVAC replacement.

Path 1: Cash-out refinance to 350k at 7.5 percent, new 30-year

New monthly P+I: 2,448 dollars. Increase of 1,101 dollars per month. Closing costs: typically 3 to 5 percent of new loan, so roughly 12,000 dollars (often financed into the loan). Total interest over the 30-year term: roughly 531,000 dollars vs roughly 213,000 dollars remaining on the existing loan. The cash-out adds roughly 318,000 dollars of lifetime interest cost for 50,000 dollars of cash. This is catastrophic math; nobody should do this.

Path 2: HELOC for 50,000 at 9.0 percent

Existing mortgage untouched. HELOC interest-only payment during 10-year draw: roughly 375 dollars per month. Repayment-period P+I over 20 years: roughly 450 dollars per month. Closing costs typically 0 to 500 dollars on a no-fee HELOC. Total interest cost over 30 years including draw and repayment: roughly 58,000 dollars. The HELOC adds 58,000 dollars of interest for 50,000 dollars of cash. Order-of-magnitude cheaper than the cash-out path.

Path 3: 10-year HEL for 50,000 at 8.75 percent

Monthly P+I: roughly 627 dollars. Total interest over 10 years: roughly 25,200 dollars. Closing costs 1,000 to 2,500 dollars. The HEL is the cheapest total-interest path because the term is shorter; the trade-off is the higher monthly payment. For a borrower who can afford 627 dollars per month on top of the existing 1,347 mortgage, this is the cleanest path.

When Cash-Out Refinance Actually Wins

The cash-out refi is the right instrument under a narrower set of conditions than its marketing suggests. First: your existing mortgage rate is above current refinance rates. If your existing mortgage is at 7.5 percent because you bought in 2023 and a cash-out 30-year today is at 7 percent, the math may favour the refinance even before counting the cash extracted. The mortgage replacement itself saves money; the cash extraction is a "free" benefit.

Second: the cash need is large relative to your mortgage balance. A 200,000 dollar cash need against a 250,000 dollar mortgage balance is structurally different from a 30,000 dollar need against a 400,000 dollar mortgage. The closing-cost-as-percent-of-cash-extracted ratio improves with larger cash extractions, and the rate increase (if any) applies to a balance that was already mostly cash-extracted.

Third: you want a single mortgage payment rather than two separate payments. There is real value in administrative simplicity, particularly for retirees or borrowers managing multiple properties. The cost of buying that simplicity is the rate-replacement on the existing mortgage balance.

The Closing-Cost Stack

Cash-out refi: typically 3 to 5 percent of the new loan amount, comprising origination (0.5 to 1 percent), appraisal (500 to 800 dollars), title insurance (varies by state, often 0.5 to 1 percent of loan), recording fees (state-specific), credit report (50 to 100 dollars), discount points if buying down rate, and lender processing fees. On a 350,000 dollar loan this totals 10,500 to 17,500 dollars.

HEL: typically 2 to 5 percent of the loan, lower than cash-out refi because of simpler underwriting and smaller loan amounts. On a 50,000 dollar HEL, closing costs commonly run 1,000 to 2,500 dollars. Some lenders waive most or all of these fees in competitive markets, particularly credit unions.

HELOC: typically 0 to 500 dollars at digital-first lenders like Figure or Aven; 300 to 1,000 dollars at most banks. HELOC is the lowest closing-cost instrument by a wide margin. This is partly because the line is not fully drawn at closing (so the loan-level economics are different) and partly because the appraisal often uses an automated valuation model (AVM) rather than a full appraisal.

Tax Treatment Across the Three

The TCJA framework treats the three instruments identically for deductibility: interest is deductible only when the proceeds are used to buy, build, or substantially improve the home securing the loan, and total acquisition indebtedness stays under 750,000 dollars. Cash-out refi has one wrinkle: the portion of the new loan equal to the refinance of the original acquisition debt retains acquisition-indebtedness status. The new cash extracted is treated under the substantial-improvement test.

See our tax-deductible interest page for the substantial-improvement test and tracing rules. For the existing site's deeper Pub 936 walkthrough see tax treatment.

Risk Profile Comparison

Cash-out refi: fixed-rate (almost always), no payment-shock at any point, but you have replaced your existing mortgage rate so any previous rate-advantage is gone. Higher monthly payment from day one. Lien is the same priority (first mortgage). Default consequences are foreclosure, same as the original mortgage.

HEL: fixed rate, predictable amortisation, second lien (subordinate to existing first mortgage). Default consequences are foreclosure initiated by the second-lien holder, which can include a junior-lien foreclosure that wipes out the borrower's equity without paying off the first.

HELOC: variable rate, payment shock at draw-period end, freeze risk during draw period per Reg Z 1026.40, second-lien position with the same junior-foreclosure risk as HEL. Highest flexibility, highest variable cost components.

Decision Matrix

Frequently Asked Questions

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Not mortgage or financial advice. Refinancing and home-equity borrowing carry real risks including foreclosure. Verify rates and terms with lenders and consult a licensed mortgage professional and tax adviser. Rates and data current May 2026.