Why a HELOC could be better than a cash-out refinance now
The decision to borrow from your accumulated home equity is dependent on multiple factors, not least of which is the borrowing environment. For instance, a cash-out refinance loan, in which homeowners take out a new mortgage loan for an amount larger than their current mortgage balance (and then keep the difference between the two as cash), can be the smart way to access funding in a low-rate climate since you'll need to reconfigure your mortgage terms.
In the interest rate climate of recent years, however, plagued by inflation and a high federal funds rate, borrowing equity via a home equity loan or home equity line of credit (HELOC) was often the cost-effective way to access a large amount of equity. With rates on credit cards and personal loans in the double digits, and mortgage rates almost double what they were a few years ago, HELOCs and home equity loans have become preferential borrowing options for many. And that's especially true now when comparing a HELOC to a cash-out refinance.
While some homeowners could still find a cash-out refinance to be their optimal home equity borrowing option, many others may be better off with a HELOC now. Below, we'll explain why.
Start by checking your HELOC eligibility requirements here.
Why a HELOC could be better than a cash-out refinance now
Here are three big reasons why a HELOC could be better than applying for a cash-out refinance now:
HELOC rates have been continually declining
It's always a positive when the interest rate on your borrowing product has been declining — and for HELOCs, that's been the case now for over a full year. Starting around 10% in early 2024, the average HELOC interest rate is poised to break below the 8% mark any day now. That came after average rates declined for much of 2024 and continued to do so in 2025, hitting 18-month and multiple two-year lows already.
This not only makes a HELOC cheaper than a home equity loan (at 8.37% on average) but also substantially less expensive than personal loans (around 12%) and credit cards (over 20%) now. And with the likelihood that HELOC rates will continue to decline in the weeks and months to come, borrowing with a line of credit could be particularly advantageous if applied for now.
Get started with a HELOC online today.
HELOCs won't require you to restructure your mortgage terms
In the interest rate climate of March 2020, when mortgage and mortgage refinance rates hovered near record lows, restructuring your mortgage terms to secure a cash-out refinance not only would not have been problematic, but depending on your mortgage rate, it may have even been an advantage.
However, the interest rate climate of March 2025 is much different. The average refinance rate for a 30-year mortgage loan is now 6.70%, meaning that many homeowners would have to take on a new, higher mortgage rate to secure their cash-out refinance. A HELOC, however, will leave your original mortgage terms untouched, giving you access to a healthy revolving line of credit without having to worry about a new, potentially unaffordable monthly mortgage payment.
HELOCs come with tax benefits
With April 15 looming for millions of taxpayers, you may find yourself looking for ways to reduce your tax bill for the future. A cash-out refinance can't help since you'll simply be reworking your existing mortgage term (although the traditional mortgage interest deductions may still be in play). Interest paid on a HELOC, however, can be tax-deductible if the line of credit is used for qualifying home repairs and renovations.
This will not only put more money in your pocket when you file your 2025 return (and all returns for the years in which you used the HELOC), but it will also make concerns over HELOC interest rates less prominent when knowing that the interest paid will add up in a deduction at the end of the year. Still, mortgage interest deductions can also be significant so it's worth speaking to a financial advisor or accountant who can better help you determine which option's tax benefits are more applicable to you.
The bottom line
With a continually declining interest rate, a structure that won't require you to redo your current mortgage terms and tax benefits that could add up to a significant return when you file your next tax return, a HELOC could be better than a cash-out refinance for many homeowners now. Still, both options require you to work with your home as a funding source, so it's smart to be careful in your process and it could be valuable to crunch your repayment figures on both to more accurately determine what's most affordable and beneficial now and, over time.
