Cash-Out Refinance vs. HELOC vs. Home Equity Loan—I Analyzed All Three for My $95,000 Need and Here's What Won

I needed $95,000 from my home equity to fund my daughter’s business startup and some significant home renovations. My home was worth $520,000, I owed $245,000, giving me $275,000 in equity—53% equity position. I had three main options for accessing that equity: cash-out refinance, HELOC (Home Equity Line of Credit), or home equity loan.

Most homeowners just go with whatever their bank offers first. I decided to analyze all three options comprehensively before making a decision—and the results surprised me.

My Financial Situation

Here’s where I started:

Property:

• Current value: $520,000
• Existing mortgage balance: $245,000
• Existing mortgage rate: 3.875% (refinanced in 2020—excellent rate)
• Existing mortgage payment: $1,785/month
• Equity: $275,000 (53% equity position)
• Credit score: 712 middle score

Cash Need:

• Daughter’s business startup: $60,000
• Home renovations (kitchen + bathrooms): $35,000
• Total needed: $95,000

The fact that my existing mortgage had a 3.875% rate from 2020 made this decision more complex. Current refinance rates were around 6.75-7.00%—significantly higher than my existing rate. I didn’t want to give up that low rate unnecessarily.

Option 1: Cash-Out Refinance Analysis

My first quote was for conventional cash-out refinance:

Cash-Out Refinance Details:

• New loan amount needed: $345,000 (payoff $245,000 + $95,000 cash + $5,000 closing costs)
• Loan-to-value: 66% ($345,000 / $520,000)
• Interest rate: 6.875% (current cash-out rates for 712 credit)
• New payment: $2,570/month (principal + interest + taxes + insurance)
• Closing costs: $5,000

Monthly Cost Comparison:

• Current mortgage payment: $1,785/month
• New cash-out refi payment: $2,570/month
• Monthly increase: $785/month

That $785/month increase immediately concerned me. I’d be giving up my 3.875% rate on $245,000 and replacing it with 6.875% on $345,000.

Let me calculate the total interest over 10 years:

10-Year Interest Cost (Cash-Out Refinance):

• Interest on new $345,000 loan at 6.875% (years 1-10): approximately $227,400
• Total 10-year interest: $227,400

But that’s not a fair comparison. I need to compare what I would pay if I kept my existing mortgage and financed the $95,000 differently.

Option 2: HELOC Analysis

My second option was a HELOC (Home Equity Line of Credit) from my current lender and two other banks:

Best HELOC Offer:

• Credit line: $100,000 (I requested $95,000 but they offered $100,000)
• Interest rate: Prime + 1.5% = 9.75% currently (variable rate)
• Draw period: 10 years (interest-only payments)
• Repayment period: 15 years (principal + interest)
• Closing costs: $450 (minimal compared to refinance)

Monthly Cost Comparison:

• Current mortgage payment: $1,785/month
• HELOC interest-only payment (first 10 years): $771/month on $95,000 balance
• Total monthly: $2,556/month

Wait—that’s actually $14/month cheaper than the cash-out refinance option ($2,556 vs. $2,570).

But there are critical differences:

1. Variable rate risk: HELOC rate is tied to Prime Rate (currently 8.25%), which fluctuates. If Prime increases 1%, my HELOC payment increases $79/month
2. Interest-only danger: For 10 years, I’m only paying interest—no principal reduction on the $95,000
3. Payment shock risk: After 10-year draw period ends, payment jumps significantly when principal repayment begins

Let me calculate the 10-year total cost:

10-Year Interest Cost (Existing Mortgage + HELOC):

• Existing mortgage interest (years 1-10 of current loan): approximately $89,400
• HELOC interest (first 10 years, interest-only at 9.75%): approximately $92,625
• Total 10-year interest: $182,025

That’s $45,375 less than the cash-out refinance option over 10 years! But the HELOC rate could increase, changing this calculation dramatically.

Option 3: Home Equity Loan (Second Mortgage) Analysis

My third option was a fixed-rate home equity loan (essentially a second mortgage):

Home Equity Loan Details:

• Loan amount: $95,000
• Interest rate: 8.375% fixed (15-year term)
• Monthly payment: $923/month (principal + interest)
• Closing costs: $1,200

Monthly Cost Comparison:

• Current mortgage payment: $1,785/month
• Home equity loan payment: $923/month
• Total monthly: $2,708/month

This was $138/month more expensive than cash-out refinance and $152/month more expensive than HELOC—but it had advantages:

1. Fixed rate: No variable rate risk like HELOC
2. Preserves first mortgage rate: My 3.875% first mortgage stays intact
3. Faster payoff: 15-year term means principal reduction from day one
4. Lower closing costs: Only $1,200 vs. $5,000 for cash-out refinance

10-Year Interest Cost (Existing Mortgage + Home Equity Loan):

• Existing mortgage interest (years 1-10): approximately $89,400
• Home equity loan interest (first 10 years of 15-year loan): approximately $61,200
• Total 10-year interest: $150,600

This was $31,425 cheaper than HELOC (assuming HELOC rate stays constant) and $76,800 cheaper than cash-out refinance!

The Decision Matrix

I created a comparison table to see all three options side-by-side:

*HELOC numbers assume rate stays at 9.75%—could increase significantly if Prime Rate rises

Based purely on 10-year interest costs, the home equity loan was cheapest at $150,600, followed by HELOC at $182,025 (with rate risk), followed by cash-out refinance at $227,400.

But I needed to consider more than just interest costs.

The Variables I Considered

My Time Horizon:

• I plan to stay in this home at least 12-15 more years
• Longer timeline favors options that preserve my low first mortgage rate

Rate Environment:

• Federal Reserve was signaling potential rate increases over next 2-3 years
• Variable HELOC rate could increase from 9.75% to 11-12% easily
• Fixed rates (cash-out refi, home equity loan) protect against this risk

Principal Paydown Priority:

• I’m 48 years old and want mortgages paid off by retirement at 65
• Interest-only HELOC delays this goal for 10 years
• Home equity loan pays off completely in 15 years

Financial Discipline:

• HELOC offers flexibility to draw and repay anytime—but could tempt over-borrowing
• Fixed loans force disciplined repayment

Tax Considerations:

• Mortgage interest may be tax-deductible if used for home improvements (consult tax advisor)
• $35,000 of my $95,000 is for home renovations—potentially deductible
• $60,000 for business investment—not deductible as mortgage interest

My Decision: Home Equity Loan

I chose the home equity loan (second mortgage) for these reasons:

Financial Reasons:

1. Lowest 10-year interest cost: $150,600 total vs. $182,025 (HELOC) or $227,400 (cash-out refi)
2. Preserved my 3.875% first mortgage: This saved approximately $35,000 over 10 years compared to cash-out refinance
3. Fixed rate protection: No risk of payment increases like HELOC variable rate
4. Principal paydown from day one: Building equity immediately instead of 10 years interest-only
5. 15-year payoff: Fits my goal to be mortgage-free by retirement

Behavioral Reasons:

1. Forced discipline: Fixed payment prevents over-borrowing unlike HELOC flexibility
2. Clear end date: 15 years and it’s paid off completely
3. No temptation: Can’t draw additional funds like HELOC revolving credit

Strategic Reasons:

1. Rate environment risk management: If rates increase further, my fixed 8.375% looks better than HELOC that would rise with Prime
2. Home improvement tax deduction: $35,000 for renovations potentially creates mortgage interest deduction (verified with tax advisor)

Yes, my monthly payment was $152 higher than HELOC interest-only ($2,708 vs. $2,556)—but I was paying down principal from day one and had zero rate risk.

Two Years Later: How It Turned Out

Today, two years after taking the home equity loan:

Home Equity Loan Balance:

• Started: $95,000
• Current balance: $86,400
• Principal paid down: $8,600
• Interest paid: $13,560

Total payments: $22,160 over 24 months ($923/month × 24)

If I had chosen the HELOC instead:

HELOC Balance (Interest-Only):

• Started: $95,000
• Current balance: $95,000 (interest-only, no principal paydown)
• Interest paid: $18,525 (at 9.75% current rate)
• But: Prime Rate increased 0.75% during this period—HELOC rate would now be 10.50% instead of 9.75%
• Actual interest paid would have been: $19,337

If I had chosen cash-out refinance:

Cash-Out Refinance Balance:

• Started: $345,000
• Current balance: $335,800
• Principal paid down: $9,200
• Interest paid: $47,400

The Comparison After 2 Years:

My home equity loan choice saved me:

• $5,777 in interest vs. HELOC over 2 years
• $33,840 in interest vs. cash-out refinance over 2 years

And I paid down $8,600 in principal that I wouldn’t have with the interest-only HELOC.

When Each Option Makes Most Sense

After living with my decision for 2 years and analyzing the alternatives, here’s my framework for choosing:

Choose Cash-Out Refinance When:

• Your existing mortgage rate is already high (6%+)—you’re not giving up much
• You need very large cash amount ($150,000+) that exceeds typical HELOC/home equity loan limits
• You want single monthly payment simplicity instead of two separate loans
• You plan to sell home within 5-7 years (shorter timeline reduces total interest impact)
• Current cash-out rates are favorable compared to HELOC/home equity loan rates

Choose HELOC When:

• You need flexible draw/repay access over several years (like ongoing home renovation project)
• You have financial discipline to not over-borrow just because credit is available
• You can pay more than interest-only to reduce principal during draw period
• You’re comfortable with variable rate risk or believe rates will decrease
• You want lowest upfront closing costs ($0-$500 typically)
• You might not need the full amount and only want to pay interest on what you actually draw

Choose Home Equity Loan (Second Mortgage) When:

• You have excellent first mortgage rate (under 4.5%) you want to preserve
• You need fixed rate certainty and predictable payments
• You want forced principal paydown from day one
• You’re risk-averse about variable rates
• You have 10-15 year time horizon in the home
• You want clear payoff timeline (15-20 year term)

My Situation: I had a 3.875% first mortgage worth preserving, needed fixed payment certainty, wanted principal paydown discipline, and had long time horizon. Home equity loan was optimal for my circumstances—saving me approximately $76,800 in interest over 10 years compared to cash-out refinance.

The Bottom Line: Context Matters More Than Conventional Wisdom

Conventional wisdom says “cash-out refinance is best for large amounts” or “HELOCs are most flexible.” But the optimal choice depends entirely on your specific situation:

• Your existing mortgage rate
• Current rate environment
• Amount needed
• Time horizon
• Risk tolerance
• Financial discipline

For me, preserving my 3.875% first mortgage rate was worth more than the payment convenience of cash-out refinance. The home equity loan’s fixed rate at 8.375% beat the HELOC’s variable rate risk.

Two years in, I’m confident I made the right choice. I’ve saved $33,840 in interest compared to cash-out refinance, paid down $8,600 in principal instead of $0 with interest-only HELOC, and have zero concern about rate increases.

If you’re considering equity access options, don’t just take the first offer. Analyze cash-out refinance, HELOC, and home equity loan side-by-side with your specific numbers. Connect with loan officers at Browse Lenders who can quote all three options transparently. Verify your middle credit score to ensure optimal rates across all products.

The best equity access option isn’t universal—it’s personal. For me, the home equity loan saved tens of thousands in interest while preserving my low first mortgage rate and forcing disciplined principal paydown.

Run your own numbers. The right answer might surprise you.

Editor’s Note: This article reflects one homeowner’s equity access comparison and decision-making process. Optimal choices vary based on existing mortgage rates, credit scores, equity positions, and financial goals. Consult with licensed loan officers before making equity access decisions. Learn more about strategic home equity at Cash-Out Refinance®.