Many homeowners have built real equity in their homes. Many also have a first mortgage with an interest rate they would rather keep. So when a big expense comes up, why refinance your entire mortgage if you only need part of the cash? A Home Equity Line of Credit or HELOC, may allow qualified homeowners to borrow against part of their equity while leaving their existing first mortgage in place.
A HELOC is not right for everyone, and it comes with real tradeoffs. This guide explains how a HELOC works, how it compares to a cash-out refinance, how to estimate your equity, and what to weigh before you borrow.
What Is a HELOC?
A HELOC is a revolving line of credit secured by your home. Instead of receiving one lump sum, you generally borrow what you need, when you need it, up to a limit set by the lender.
During the draw period, you may borrow money, repay it, and borrow again. When the draw period ends, you can no longer borrow, and you repay what you owe over a repayment period. Monthly payments can rise when repayment begins
HELOCs commonly have variable interest rates, which means your payment can change over time. Some lenders let you convert part of the balance to a fixed rate. The Consumer Financial Protection Bureau offers a helpful overview in its guide, What is a home equity line of credit (HELOC)?.
HELOC vs. Cash-Out Refinance: What Happens to Your First Mortgage?
The biggest difference between the two options is what happens to the mortgage you already have.
- With a cash-out refinance, you refinance your entire mortgage: your current first mortgage is replaced with a new mortgage, which comes with its own rate, term and payment.
- With a HELOC, the existing first mortgage generally stays in place, and the line of credit is a separate loan.
Here is a simple example for illustration only. Imagine a homeowner who owes $400,000 on a mortgage but only needs $75,000 for a project. A cash-out refinance may require replacing the entire first mortgage with a new loan. A HELOC may allow the homeowner to borrow against available equity separately.
That does not mean a HELOC is always the better choice. The right answer depends on your goals, rates, credit profile, available equity, monthly payment and overall financial situation.
Want a breakdown of both options? Download the free Home Equity Playbook.
When You May Not Need to Refinance Your Entire Mortgage
If you refinance your entire mortgage, the new loan terms apply to the whole balance, not only to the cash you take out. For that reason, some homeowners look at a HELOC first. You may want to explore one if:
- You have a first mortgage rate you do not want to give up.
- You only need part of your equity, not a large new loan.
- You want flexible access to funds over time, such as for a project with costs spread out.
- You want to compare your options before replacing your whole mortgage.
A refinance can still make sense, for example when you want to change the rate or term on your whole loan. The point is to compare both paths instead of assuming you must refinance your entire mortgage to reach your goal.
How Much Home Equity Do You Have?
A simple starting point is:
Estimated Home Value − Current Mortgage Balance = Approximate Home Equity
For example, a home worth an estimated $500,000 with a $400,000 mortgage balance has roughly $100,000 in equity. This is an illustration, not a prediction of what you could borrow.
Not all of your equity will necessarily be available to borrow. Lenders typically set maximum loan-to-value (LTV) or combined loan-to-value (CLTV) limits, which cap how much total debt can be secured by your home compared to its value. A loan officer can help you estimate what may apply to your situation.
Common Reasons Homeowners Consider a HELOC
Homeowners explore their equity for many reasons. Common ones include:
- Home improvements, such as a kitchen or bathroom remodel, a new roof, HVAC, an ADU, a pool or major repairs
- Paying off higher-interest debt
- Major or emergency expenses
- Education costs
- Purchasing another property or pursuing an investment opportunity
- Creating additional financial flexibility
A Closer Look at Using Equity to Pay Off Debt
Some homeowners use equity to consolidate credit cards, personal loans or other higher-interest debt. That can change monthly cash flow, but there is an important tradeoff: you are converting unsecured debt into debt secured by your home. Never decide based on the interest rate alone. Look at your full financial picture.
Learn more about: Consolidate Debt Using a HELOC or Cash-Out Refinance to Simplify Your Finances
Risks and Costs to Weigh Before You Borrow
A HELOC can be a useful alternative to having to refinance your entire mortgage, but it carries risks you should understand first:
- Rates are often variable, so payments can go up or down.
- Your home is the collateral. If you cannot keep up with payments, you could lose your home.
- Payments may rise when the draw period ends and repayment begins.
- Fees may apply to open or maintain the credit line, so ask about them up front.
- A lender may limit or freeze borrowing if your home value drops significantly or your financial situation changes.
- Borrowing more adds to your total debt, even when the first mortgage stays the same.
Is a HELOC Right for You?
Every homeowner’s situation is different. Before you decide to refinance your entire mortgage or open a HELOC, consider your goals and your comfort with risk. In general, a HELOC may be worth a closer look if you:
- Have meaningful equity in your home
- Want to keep your existing first mortgage in place
- Need flexible access to funds rather than one lump sum
- Are comfortable with a payment that can change
It may not be the best fit if you:
- Prefer one lump sum with a predictable payment
- Are not comfortable using your home as collateral
- Need more than your available equity allows
- Expect trouble keeping up if your payment rises
Questions to Ask Your Loan Officer
Bring these questions to your conversation so you can compare options with confidence:
- How much equity could I potentially access based on my situation?
- Is the rate variable, and can any part of the balance be fixed?
- How long is the draw period, and what happens when repayment begins?
- What fees apply to open and maintain the line?
- How could my payment change if rates rise?
- How does a HELOC compare to a cash-out refinance for my goal?
Frequently Asked Questions
Do You Have to Refinance Your Entire Mortgage to Get Cash Out?
Not always. You may not need to refinance your entire mortgage, because a HELOC may allow qualified homeowners to borrow against part of their equity while their existing first mortgage stays in place. Eligibility depends on factors such as your equity, credit and overall financial profile.
Is a HELOC the same as a cash-out refinance?
No. A cash-out refinance replaces your current first mortgage with a new one. A HELOC is a separate line of credit that generally leaves your first mortgage in place.
Do HELOCs have fixed or variable rates?
HELOCs commonly have variable rates, so your payment can change. Some lenders offer the option to convert part of the balance to a fixed rate.
What is the biggest risk of a HELOC?
Your home secures the line of credit. If you are unable to repay as agreed, you could lose your home. That is why it is important to borrow only what you are confident you can repay.
The Better Question to Ask
Instead of asking, “Should I get a HELOC?” start with a bigger question: “What am I trying to accomplish, and what is the smartest way to use the equity I have built?” For some homeowners the answer is a HELOC. For others it is a cash-out refinance or another option. Either way, you should not have to refinance your entire mortgage just because you need some cash without first comparing your choices.
Get your free copy and see how home equity is calculated, how a HELOC compares to a cash-out refinance, and what to weigh before you borrow.
