Key takeaways
- A HELOC is a variable-rate revolving line; a home equity loan is a fixed-rate lump sum.
- A cash-out refinance replaces your first mortgage entirely at today's rate.
- If your first mortgage carries a low rate, leave it alone and use a second lien.
- Interest is deductible only when proceeds substantially improve the securing home, subject to limits.
How the three differ
A home equity line of credit is a revolving second lien with a draw period, typically ten years, during which you may borrow and repay repeatedly, usually at a variable rate tied to prime. After the draw period it converts to a repayment period, and the payment can jump substantially.
A home equity loan is a fixed-rate, fixed-term second lien disbursed as a lump sum. A cash-out refinance is not a second lien at all — it replaces the first mortgage with a larger one at current market rates, applying that rate to your entire balance.
Choosing between them
If your existing first mortgage is at a rate well below current market, a cash-out refinance is usually the wrong answer even when its rate looks lower than a HELOC's. Repricing an entire low-rate balance to access a fraction of it is expensive arithmetic that a payment comparison hides.
Use a HELOC for uncertain or staged spending — a renovation with unclear final scope, a business need, or a liquidity reserve. Use a home equity loan when you know the amount and want payment certainty. Use a cash-out refinance when current rates are at or below your existing rate, or when you are consolidating a first and second lien.
Risk and tax treatment
All three are secured by your home. Default risk is foreclosure, which is a materially different consequence than defaulting on unsecured debt. HELOC variable rates mean payment risk as well, and lenders retain the contractual right to freeze or reduce lines when property values fall — many did in 2008 and again in 2020.
On tax treatment, interest is deductible only if proceeds are used to buy, build, or substantially improve the home securing the loan, subject to the overall mortgage interest limits. Using a HELOC to pay off credit cards does not produce deductible interest. Confirm with a tax professional; see our tax guides.
Frequently asked questions
How much equity can I access?
Most lenders allow combined loan-to-value up to 80% to 85%, with some going to 90% at higher pricing. Subtract your existing balance from that ceiling.
Are HELOC closing costs really zero?
Often low or waived, but many carry annual fees, early-closure fees if you close within a few years, and draw minimums. Read the fee schedule.
Can I get a HELOC on a rental property?
Yes, though fewer lenders offer it, LTV limits are lower, and pricing is higher. Portfolio lenders and credit unions are the usual sources.
Sources & further reading
- Consumer Financial Protection Bureau, What you should know about home equity lines of credit
- IRS Publication 936, Home Mortgage Interest Deduction
- Federal Reserve, Consumer Handbook on Adjustable-Rate Mortgages
Figures and rules change. Verify current requirements with the issuing agency or a licensed professional before acting.