If you have meaningful equity in your home and need cash for a renovation, debt consolidation, or business capital, you have two mainstream choices: a home equity line of credit (HELOC) or a cash-out refinance. Both turn equity into spendable cash. They behave very differently.
The difference, in one paragraph each
HELOC
A revolving credit line secured by your home. You're approved for a maximum (often up to 65–80% of your home value minus the existing mortgage), draw what you want when you want, pay interest only on the drawn balance. Most HELOCs are variable-rate tied to prime + a margin. Your existing first mortgage stays exactly as it is.
Cash-out refinance
You replace your existing mortgage with a new, larger one and pocket the difference in cash. The new mortgage has its own term and rate (usually fixed). Your old mortgage is paid off as part of the closing.
The decision matrix
Pick a HELOC when…
- You don't need all the money at once (e.g. a renovation paid in stages).
- Your existing mortgage rate is great and you don't want to lose it.
- You can pay it down quickly — variable-rate exposure is short.
- You want flexibility to draw, repay, redraw — closer to a credit card secured by your house than a fixed loan.
Pick a cash-out refi when…
- You need a large lump sum (think buying out a partner, big renovation, paying off high-interest debt).
- Current mortgage rates are lower than your existing rate (rare but possible) — you reduce your rate and pull cash in one move.
- You want a fixed payment for a known number of years.
- You're uncomfortable with rate risk — refis lock the rate for the term.
Closing costs: the often-ignored differential
HELOCs are usually cheap to set up — sometimes free, sometimes a few hundred dollars in legal/appraisal fees. Cash-out refis are full mortgage originations: appraisal, lender fees, title, possibly mortgage insurance, and in some US states meaningful stamp/recording taxes. Closing costs of 2–4% of the new loan amount are common.
On a $400,000 refi, that's $8,000–$16,000 in friction you have to recoup through better terms. If your rate isn't materially better and you don't truly need the lump sum, a HELOC is hard to beat.
Tax deductibility
United States
Interest on either is deductible (subject to the $750K combined-mortgage cap) only if the proceeds are used to buy, build, or substantially improve the home. Cash out for vacations, debt consolidation, or business purposes is not interest-deductible at the federal level. State rules vary.
Canada
Mortgage interest on a primary residence is notdeductible regardless. The exception: if you can clearly demonstrate the borrowed money was used for an income-producing purpose (e.g. invested in a non-registered account or used to buy a rental property), the interest portion attributable to that use becomes deductible. This is the “Smith Manoeuvre” — popular but easy to mess up; track every dollar.
The risk people underestimate
Both options put your home at risk if you can't repay. With a HELOC, the risk is concentrated: a variable-rate increase + life event (job loss, illness) can balloon the payment fast. With a refi, you've usually moved from one fixed payment to a different fixed payment, but on a higher loan amount over potentially a longer term — often resetting the clock to 30 years even if you were 10 years into your original mortgage.
The third option: don't do either
For modest cash needs (under $50K), an unsecured personal loan or even a 0%-promotional credit card transfer might be cheaper than the closing-cost and rate-risk bundle of either option. Unsecured loans don't put your home on the line, period.
Bottom line
HELOCs and cash-out refis solve different problems. HELOCs are flexible revolving credit; refis are big fixed loans. Get the structure that matches the actual cash-flow shape of what you're funding, and run the closing costs vs. interest savings out at least 5 years before signing anything.