HELOC vs cash-out refinance: the rate gap just widened
Two ways to turn home equity into cash — a HELOC and a cash-out refinance — now carry a wider rate gap than they have for most of the past year. HELOCs average 7.90% against roughly 6.78% for a cash-out refinance, and that spread changes which one makes sense for a lot of homeowners who might have defaulted to a HELOC out of habit.
A HELOC layers a second, variable-rate credit line on top of your existing mortgage, leaving your original rate untouched. A cash-out refinance replaces the entire first mortgage with a new, larger one — meaning if your current mortgage rate is well below today's market rate, a cash-out refinance means giving up that original low rate on your entire balance, not just the amount you are pulling out.
That trade-off is exactly why the decision is not just "which rate is lower." A homeowner sitting on a 3.5% mortgage from 2021 who cash-out refinances into a 6.78% loan is raising the rate on their entire existing balance, not only the new money — often erasing any advantage from the lower headline rate once the math is run on the whole loan rather than just the amount withdrawn. For that borrower, a HELOC's higher rate on a smaller, separate balance can cost less in total dollars.
The math flips for someone whose existing mortgage rate is already close to or above today's market rate. In that case, a cash-out refinance genuinely can lower the rate on the whole loan while also pulling out cash — capturing two benefits in one move, which is the scenario cash-out refinancing was built for.
The rule of thumb: check your current mortgage rate before you compare anything else. Below roughly 5%, a HELOC usually protects more value even at its higher rate. Above 6.5%, run a full cash-out refinance quote — you may be able to lower your whole payment and access equity at the same time. Either way, compare the actual monthly payment and total interest side by side rather than the headline rate alone.