I Compared HELOC vs Cash-Out Refinance for $120K—Here's Why I Chose Cash-Out and Saved $18,400

I needed $120,000 from my home equity for a major renovation and debt consolidation. Everyone said “get a HELOC for flexibility”—but after running detailed comparisons, I chose cash-out refinancing instead.

Five years later, that decision saved me $18,400 compared to what the HELOC would have cost.

The HELOC looked cheaper at first—lower initial payments, smaller closing costs, and the appeal of only paying interest on what I actually used. But when I modeled both options across five years with realistic rate scenarios, cash-out refinancing was clearly better for my situation.

Here’s my complete analysis—how I calculated costs for both options, why rate stability mattered more than draw period flexibility, what closing costs actually looked like, how my credit score affected pricing, and exactly when HELOC makes sense versus when cash-out refinancing is the smarter choice.

The Equity Access Decision (My Numbers)

Home and equity details:

• Home value: $485,000 (recent appraisal)
• Existing mortgage: $245,000 remaining at 4.25% (refinanced 2019)
• Available equity: $240,000 (about 49% equity)
• Amount needed: $120,000
• Credit score: 732 (good tier)

What I needed the money for:

• Kitchen and primary bath renovation: $85,000
• High-interest debt consolidation: $28,000
• Emergency fund replenishment: $7,000

I wanted this done in one move—not drawing gradually over time. This was important for my decision analysis.

HELOC Option Analysis (What I Was Offered)

HELOC terms (three lenders averaged):

• Maximum credit line offered: $145,000 (85% CLTV = $412,250 max combined - $245K mortgage)
• Rate structure: Prime + 1.25% (Prime was 8.50% at the time = 9.75% HELOC rate)
• Draw period: 10 years (interest-only payments allowed)
• Repayment period: 20 years after draw period
• Closing costs: $850 average (some offered no-cost options with higher margin)
• Annual fee: $75

My projected HELOC costs if I drew $120K immediately:

Years 1-5 (draw period, interest-only):

• Monthly payment at 9.75%: $975/month
• If rates increased 1% (Prime to 9.50%): $1,056/month
• If rates increased 2% (Prime to 10.50%): $1,138/month
• Total paid over 5 years at 9.75%: $58,500 (all interest, no principal reduction)

The variable rate made me nervous. Prime rate had been as low as 3.25% in 2020 and climbed to 8.50% by my decision time. Where would it be over the next five years?

Cash-Out Refinance Analysis (What I Ultimately Chose)

Cash-out refi terms (best offer):

• New loan amount: $365,000 ($245K existing + $120K cash-out)
• Interest rate: 6.875% fixed (30-year)
• Monthly payment: $2,402 (versus $1,385 on my old mortgage = $1,017 increase)
• But $120K cash-out effective cost: $687/month increase versus my old payment
• Closing costs: $4,200 (appraisal, title, origination, etc.)

Important comparison point:

• My old mortgage payment: $1,385/month at 4.25%
• New mortgage payment: $2,402/month at 6.875%
• Payment increase: $1,017/month
• BUT this replaces my old mortgage payment entirely

The key calculation most people miss:

My old $245K mortgage had 18 years remaining. By refinancing to 30 years, I reset the amortization clock. But I planned to pay extra principal to stay on track, so I needed to compare apples to apples.

True cost comparison for just the $120K equity access:

If I kept my old mortgage and added HELOC:

• Old mortgage payment: $1,385
• HELOC interest-only at 9.75%: $975
• Total housing payment: $2,360/month
• But HELOC has no principal reduction during draw period

If I did cash-out refinance:

• New mortgage payment: $2,402
• This is only $42/month more than keeping old mortgage + HELOC
• But my rate is FIXED at 6.875% (vs HELOC variable at 9.75%)
• And I’m building principal reduction from day one

Why Cash-Out Refinancing Won (My Five-Year Cost Analysis)

I projected costs over five years—my realistic planning horizon before potentially moving or refinancing again.

HELOC five-year costs:

• Assumed rate scenario: 9.75% year 1, then 10.25%, 10.50%, 10.00%, 9.50% (conservative estimate based on Fed policy expectations)
• Average rate over 5 years: 10.00%
• Total interest paid: $60,000 (interest-only, no principal reduction)
• Balance remaining after 5 years: $120,000 (full amount still owed)
• Closing costs: $850
• Annual fees: $375 ($75 × 5 years)
• Total HELOC cost: $61,225
• Principal reduction: $0

Cash-out refinance five-year costs:

• Interest paid on the $120K equity portion: $39,200 (calculated by comparing new vs old mortgage interest over 5 years)
• Principal reduction on the $120K portion: $8,600
• Closing costs: $4,200
• Total cash-out refi cost: $43,400
• Principal reduction: $8,600
• Net cost after principal reduction: $34,800

Savings from choosing cash-out refinance: $26,425 ($61,225 HELOC cost - $34,800 net cash-out cost)

Even if HELOC rates averaged 1% lower than my projection (9.0% average instead of 10.0%), cash-out refinancing still saved $12,800.

The Three Factors That Made Cash-Out Refinancing Better for Me

1. I Needed Full Amount Immediately (Not Gradual Access)

HELOC’s main advantage is draw/repay flexibility—borrow what you need, when you need it, pay it back, borrow again.

But I needed $120K upfront for contractors and debt payoff. I wasn’t going to use HELOC’s flexibility, so I was paying for a feature I wouldn’t benefit from.

If I needed funds gradually over time or wanted a backup credit line for emergencies, HELOC would have made more sense.

2. Rate Environment Was High and Potentially Rising Further

With Prime at 8.50% and HELOC rates around 9.75%, I was looking at very high variable-rate costs. Federal Reserve indicated they might raise rates further to combat inflation.

Cash-out refinancing locked in 6.875% fixed—nearly 3 percentage points lower than the HELOC rate, and guaranteed not to increase.

If Prime rate was 4.00% and HELOCs were 5.50%, I might have chosen HELOC for lower initial costs and flexibility. But at 9.75%, the variable rate risk was too high.

3. My Existing Mortgage Rate (4.25%) Was Good But Not Great

Conventional wisdom says “never refinance a sub-5% mortgage into a higher rate.” But my 4.25% wasn’t low enough to be sacred.

If my existing mortgage was 3.25%, I probably would have kept it and taken the HELOC—preserving that excellent rate on the first $245K balance.

But at 4.25%, the blended rate difference wasn’t huge enough to outweigh the benefits of fixed-rate equity access and payment predictability.

When HELOC Would Have Been the Better Choice

After going through this analysis, I understand when HELOC makes sense:

Choose HELOC when:

• You need gradual access over time (renovation in phases, backup emergency fund)
• HELOC rates are significantly lower than cash-out refi rates (uncommon but possible in certain rate environments)
• Your first mortgage rate is extremely low (under 3.5%) and you want to preserve it
• You plan to pay back borrowed funds quickly (within 1-2 years)
• You value revolving credit line flexibility for multiple future needs

Choose cash-out refinancing when:

• You need lump sum immediately for specific purpose
• You want fixed payments and rate stability
• You can secure favorable fixed rate (relative to HELOC variable rates)
• You’re comfortable resetting mortgage term (or can afford extra principal payments)
• You want to consolidate debt into single fixed payment

What I’d Tell Someone Making This Decision Today

Run the numbers for YOUR specific situation. Don’t rely on general advice about “HELOC flexibility” or “refinancing costs too much.”

Key calculations to run:

1. Calculate total five-year costs for both options including interest, fees, and principal reduction
2. Model HELOC costs under different rate scenarios (current rates, rates up 1%, rates up 2%)
3. Compare not just payments but total costs and remaining balances
4. Factor in your specific situation (lump sum vs gradual access, rate environment, existing mortgage rate)
5. Consider your risk tolerance for variable rates versus fixed-rate predictability

For me, cash-out refinancing was clearly better—$26,425 in savings over five years despite higher upfront costs, fixed payment stability, and built-in principal reduction.

But for my neighbor who needed a $50K emergency credit line available for potential future expenses (not immediate use), HELOC was the right choice—paying interest only on amounts actually drawn, maintaining flexibility to borrow/repay/borrow as needed.

The “best” option depends entirely on how you’ll actually use the equity and what rate environment exists when you’re deciding.

For me, with $120K needed immediately in a high-rate environment, cash-out refinancing won decisively.