Home equity · decision guide
HELOC vs Cash-Out Refinance for Renovations
The instinct is to pick whichever has the lower rate. That instinct is usually wrong, and the reason is the most important thing on this page: one of these products reprices the debt you already have, and the other does not.
If you hold a mortgage at a rate below today's, a HELOC is usually cheaper — even though HELOC rates are higher. A cash-out refinance reprices your entire balance at today's rate; a HELOC prices only the new money. On the worked example below, the HELOC costs $465 a month less despite carrying a rate nearly a full point above the refinance.
What each one actually does
HELOC
A revolving line of credit secured by your home, sitting as a second lien behind your existing mortgage, which stays exactly as it is. You draw what you need, when you need it, and pay interest only on what you have drawn. The rate is variable, usually tied to prime.
Cash-out refinance
A brand new first mortgage that pays off your old one and is larger by the amount you take out. You get one lump sum, one fixed rate, one payment — and your previous mortgage, whatever its rate, ceases to exist.
That structural difference — second lien versus replacement — drives everything else. It is why the product with the higher advertised rate is frequently the one that costs less.
Where rates sit in July 2026
Published national HELOC averages cluster in the low-to-mid 7s: 7.44% from Bankrate (July 29, 2026), 7.23% from Curinos data published via Forbes Advisor for average adjustable HELOCs, and 7.50% from Experian. Call it a range of roughly 7.2% to 7.5% rather than a single number.
Cash-out refinance rates are harder to pin down, and we are not going to invent a figure. There is no reliable published national average for cash-out specifically. What is documented is the mechanism: Fannie Mae applies loan-level price adjustments to cash-out refinances based on loan-to-value and credit score, in addition to any other adjustments that already apply. So a cash-out will be quoted above a rate-and-term refinance for the same borrower, and above the Freddie Mac 30-year survey average, which was 6.66% for the week of July 30, 2026.
Read this the right way
In the worked example below we price the cash-out at 6.66% — the survey baseline. That is the optimistic case for the refinance, since cash-out prices above it. If the HELOC still wins at the refinance's best possible rate, it wins by more in reality.
The math, worked
A common situation: you own a $500,000 home, you owe $300,000 at 4.25% from a loan you took out some years ago, and you need $60,000 for a kitchen.
| Keep mortgage + HELOC | Cash-out refinance | |
|---|---|---|
| First mortgage | $300,000 @ 4.25% | Paid off |
| New borrowing | $60,000 HELOC @ 7.44% | $360,000 @ 6.66% |
| First mortgage payment | $1,476 | — |
| New-money payment | $372 (interest-only) | — |
| Total monthly payment | $1,848 | $2,313 |
| Difference | — | +$465 / month |
Both mortgage payments are principal and interest on a 30-year term from the standard amortization formula. HELOC figure is interest-only at 7.44% on the full $60,000 drawn, which is how most draw periods work — see the caveat below. Cash-out priced at the 30-year survey average of 6.66%, the optimistic case.
The reason is visible if you isolate the old balance. The cash-out moves $300,000 that was costing 4.25% onto 6.66% — an extra 2.41 percentage points on money you had already borrowed cheaply. That is about $7,230 a year in additional interest before you have touched the renovation at all. The HELOC's higher rate applies only to $60,000, where a percentage point is worth $600 a year.
The honest caveat
That $372 HELOC payment is interest-only — it retires no principal, so the $60,000 does not shrink. The cash-out payment does amortize. Comparing them straight across flatters the HELOC. The fair comparison adds voluntary principal to the HELOC, and the fair warning is that when the draw period ends and principal becomes mandatory, the payment jumps. Model the post-draw payment before you sign, not the teaser one.
This flips entirely if your existing rate is at or above today's. Then a cash-out is not surrendering anything, you consolidate into one fixed payment, and the refinance usually wins. Run your own version with the HELOC vs cash-out refinance calculator or the home equity borrowing power calculator.
Side by side
| HELOC | Cash-out refinance | |
|---|---|---|
| What it does | Adds a second lien behind your first mortgage | Replaces your first mortgage with a bigger one |
| What gets repriced | Only the new money you draw | Every dollar you already owe, plus the new money |
| Rate structure | Variable, usually tied to prime | Fixed for the life of the new loan |
| Rate level (July 2026) | ~7.2%–7.5% published averages | Prices above the 30-year baseline of 6.66% |
| Upfront costs | Low; sometimes waived | Full mortgage closing costs |
| How you draw | As needed, over a draw period | One lump sum at closing |
| Payment shape | Interest-only during draw, then principal added | Level principal and interest from day one |
| Tax deductibility | Only if spent to buy, build, or substantially improve the home | Same test applies to the cash-out portion |
| Main risk | Payment jumps when the draw period ends | You surrender your existing rate permanently |
What the IRS actually allows you to deduct
This is widely misunderstood, and the rule is narrower than most people assume. Under IRS Publication 936, interest on a home equity loan, line of credit, or credit-card loan secured by your home is deductible only if the proceeds are used to buy, build, or substantially improve the qualified home that secures the loan. Spend it on a kitchen and it qualifies; spend it consolidating credit cards or paying tuition and it does not — even though the loan is identical.
Where it does qualify, the borrowing is classified as home acquisition debt and falls under the standard limit: interest on the first $750,000 of indebtedness ($375,000 if married filing separately). Debt incurred before December 16, 2017 keeps the older, higher limits of $1 million and $500,000. Note that the limit applies to your combined qualifying debt, so a large first mortgage can leave little room for the equity borrowing on top.
For tax years before 2018 the use test did not exist — home equity interest was deductible regardless of what you spent it on. A lot of advice still circulating online predates that change.
Not tax advice
This is a general summary of published IRS guidance, not advice about your return. Deductibility also depends on whether you itemize at all — many households take the standard deduction and get no benefit from mortgage interest whatsoever. Confirm your position with a tax professional before factoring a deduction into the decision.
When neither is the right answer
- The project is small. On a $10,000 job, an appraisal and closing costs can eat the entire advantage of a lower rate. Unsecured borrowing or cash is often genuinely cheaper all-in.
- You have little equity. Lenders cap combined borrowing at roughly 80%–90% of value depending on credit tier, and your existing mortgage counts toward it. If you cannot clear the ceiling, the question is moot.
- Your income is unstable. Both products are secured by your home. Unsecured credit costs more in interest but a bad year becomes a collections problem rather than a foreclosure.
- The debt-to-income test binds first. For plenty of borrowers it is DTI, not equity, that stops the loan. Check with the DTI calculator.
The option nobody sells you is phasing the work and paying cash as you go. It is slower and it is frequently the cheapest renovation financing available. Size the project honestly first with our renovation cost calculator and the renovation costs guide.
Choose a HELOC if / choose cash-out if
Choose a HELOC if
- Your existing mortgage rate is below today's — the single strongest signal.
- You are borrowing a small fraction of what you already owe.
- The project will be paid in stages, so you would rather draw as you go.
- You want to keep upfront costs low and might not use the full line.
- You can handle a variable rate and the post-draw payment step-up.
Choose cash-out if
- Your existing rate is at or above current rates — you give up nothing.
- You want one fixed payment and no exposure to rate moves.
- The amount is large relative to your existing balance.
- You need the whole sum at once and the work starts immediately.
- You were going to refinance anyway for other reasons.
If you are weighing a refinance on its own merits — rate, term, break-even — start with is refinancing worth it, which works the break-even formula in full.
Run your numbers
How much can you actually borrow?
See which limit binds — combined loan-to-value or debt-to-income — then price a HELOC, a home equity loan, and a cash-out refinance on the same amount.
Keep reading
- Home Renovation Costs in 2026Whole-house and room-by-room costs, cost drivers, and contingency norms — size the project before you finance it.
- Is Refinancing Worth It?The break-even formula worked in full, and when refinancing is a mistake.
- How to Read a Contractor's QuoteBefore you borrow against the house, make sure the number you are borrowing is the right number.
- Kitchen Remodel Costs, Line by LineWhere the money goes in the most commonly financed renovation of all.
Frequently asked questions
Is a HELOC or a cash-out refinance better for a renovation?+
For most owners who already hold a mortgage below today's rates, a HELOC wins — even though HELOC rates are higher. A cash-out refinance replaces your entire first mortgage, so it reprices every dollar you already owe at today's rate, while a HELOC prices only the new money. If you are borrowing a small fraction of what you owe and your existing rate is low, that difference usually swamps the rate on the new borrowing.
What are HELOC rates in 2026?+
As of late July 2026, published national HELOC averages sit in the low-to-mid 7% range: Bankrate reported 7.44% on July 29, 2026, Curinos data published via Forbes Advisor showed 7.23% for average adjustable HELOCs, and Experian reported 7.50%. HELOC rates are variable and usually tied to the prime rate, so they move with the Federal Reserve rather than staying fixed like a mortgage rate.
Does a cash-out refinance have a higher rate than a normal refinance?+
Generally yes. Fannie Mae applies loan-level price adjustments to cash-out refinances based on loan-to-value ratio and credit score, in addition to any other adjustments that already apply — so the same borrower will be quoted more for a cash-out than for a rate-and-term refinance. There is no reliable published national average for cash-out rates specifically, so compare your own quotes rather than trusting a headline figure.
Is HELOC interest tax deductible?+
Only if you spend the money on the home. Under IRS Publication 936, interest on a home equity loan or line of credit is deductible only where the proceeds are used to buy, build, or substantially improve the qualified home that secures the loan — in which case it is treated as home acquisition debt, subject to the $750,000 limit ($375,000 if married filing separately). Debt incurred before December 16, 2017 keeps higher grandfathered limits of $1 million and $500,000. Using a HELOC to consolidate credit cards or pay tuition does not qualify. This is general information, not tax advice — confirm your situation with a tax professional.
How much equity do I need to borrow against my home?+
Lenders work from a combined loan-to-value limit, typically allowing total borrowing of 80% to 90% of the home's value depending on your credit tier, with your existing mortgage counting toward that ceiling. A separate debt-to-income test applies on top, and for many borrowers it is the DTI limit rather than the equity limit that actually binds. Our Home Equity Borrowing Power Calculator shows which of the two constraints is stopping you.
What are the closing costs on a cash-out refinance?+
A cash-out refinance is a full mortgage origination and carries full closing costs — a new appraisal, title work, lender fees, and recording. Refinance closing costs run meaningfully below purchase closing costs, but they are still thousands of dollars, and they are the reason the break-even calculation matters. HELOCs typically carry much lower upfront costs, and some lenders waive them entirely in exchange for an early-closure fee if you shut the line within a set period.
When is neither a HELOC nor a cash-out refinance right?+
Three situations. If the project is small, the closing costs and appraisal on either product can exceed the benefit of the lower rate. If you have little equity, you may not clear the combined loan-to-value limit at all. And if your income is unstable, secured borrowing converts a budgeting problem into a foreclosure risk — an unsecured loan costs more in interest but does not put the house up as collateral. The honest fourth option is to phase the project and pay cash as you go.
Can I lose my house if I can't repay a HELOC?+
Yes. Both a HELOC and a cash-out refinance are secured by your home, which is exactly why they price below unsecured credit. A HELOC carries a second risk worth understanding: most have a draw period of interest-only payments followed by a repayment period in which principal is added, and the payment can jump sharply at that transition. Check the draw and repayment terms before you sign, and model the post-draw payment rather than the interest-only one.
Methodology
Mortgage payments in the worked example are computed from the standard amortization formula on a 30-year term, principal and interest only: $300,000 at 4.25% gives $1,476, and $360,000 at 6.66% gives $2,313. The HELOC figure is interest-only on $60,000 at 7.44% ($372), which reflects how most draw periods work but does not retire principal — stated explicitly in the body rather than buried. HELOC rates are published national averages from three independent sources on the dates given and are variable, not locked. We deliberately price the cash-out at the Freddie Mac 30-year survey average of 6.66% for the week of July 30, 2026 rather than at a cash-out rate, because no reliable published national cash-out average exists; since Fannie Mae's loan-level price adjustments mean cash-out prices above that baseline, this is the most favourable assumption for the refinance and the HELOC's advantage would be larger in practice. Tax treatment is summarised from IRS Publication 936 as published at the access date. This guide is educational and is not financial or tax advice.
Sources
- Bankrate — Current HELOC Rates (national average 7.44%, July 29, 2026) — accessed 2026-07-30
- Forbes Advisor — Current HELOC & Home Equity Loan Rates, July 30, 2026 (Curinos data, 7.23% average adjustable) — accessed 2026-07-30
- Experian — Compare Current HELOC Rates (7.50%, July 2026) — accessed 2026-07-30
- Freddie Mac — Primary Mortgage Market Survey (30-year 6.66%, week of July 30, 2026) — accessed 2026-07-30
- Fannie Mae Selling Guide B2-1.3-03 — Cash-Out Refinance Transactions — accessed 2026-07-30
- Fannie Mae — Loan-Level Price Adjustment (LLPA) Matrix — accessed 2026-07-30
- IRS — Publication 936, Home Mortgage Interest Deduction — accessed 2026-07-30
- IRS — Publication 936 (PDF) — accessed 2026-07-30