HELOC vs. home equity loan vs. cash-out refinance: which is right for you?

If your home has gone up in value, you may be sitting on a lot of equity. There are three common ways to turn some of it into cash: a home equity line of credit (HELOC), a home equity loan, and a cash-out refinance. All three can pay for a renovation, a large expense or paying down higher-interest debt, but they work very differently, and the wrong choice can cost you thousands.

This guide explains each option in plain language, compares them side by side, and covers the extra rules that apply if your home is in Texas.

The short answer

• Choose a HELOC if you need money over time, don’t know the exact amount yet, and are comfortable with a rate that can change.
• Choose a home equity loan if you need one lump sum and want a fixed payment you can plan around.
• Choose a cash-out refinance if today’s rates are close to or lower than the rate on your current mortgage, or if you want one loan instead of two.

The single biggest factor is usually the rate on your current mortgage. If you locked in a low rate a few years ago, a cash-out refinance replaces that low rate on your entire balance. A HELOC or home equity loan leaves your first mortgage alone.

How each option works

Home equity line of credit (HELOC)

A HELOC is a revolving line of credit secured by your home. You’re approved for a maximum amount, and you borrow from it when you need to, repay, and borrow again.

• Draw period: usually around 10 years. Many HELOCs let you pay only interest during this time.
• Repayment period: after the draw period ends, you repay principal and interest, so the payment can rise noticeably.
• Rate: usually variable, tied to the prime rate plus a margin. When rates move, your payment moves.
• Your first mortgage stays the same. The HELOC is usually a second lien.

Home equity loan

A home equity loan is a one-time lump sum with a fixed rate and a fixed monthly payment over a set term, often 10 to 20 years.

• You get all the money at closing and start repaying right away.
• The payment doesn’t change, which makes budgeting easier.
• Like a HELOC, it sits behind your existing first mortgage, which stays untouched.

Cash-out refinance

A cash-out refinance replaces your current mortgage with a new, larger one. You receive the difference in cash at closing.

• You end up with one loan and one payment.
• The new rate applies to the entire balance, not just the cash you take out.
• Closing costs are usually higher than for a HELOC or home equity loan, because you’re taking out a full new first mortgage.
• It also resets your loan term, so think about how many years you’ve already paid.

Side-by-side comparison

How much can you borrow?

Lenders look at your combined loan-to-value (CLTV): everything you owe on the home, including the new loan, divided by the home’s value. Many lenders cap this at 80% to 85%, and some go higher. In Texas, the limit is 80% by law.

Size your own usable equity on our home equity page, and compare a new loan against your current one with the refinance calculator.

Texas home equity rules: what’s different

Texas protects homesteads more strongly than any other state. These rules come from Article XVI, Section 50(a)(6) of the Texas Constitution, so no lender can waive them. They apply to home equity loans, HELOCs and cash-out refinances on your homestead (your primary residence).

• 80% cap. All debt secured by your home, including the new loan, can’t exceed 80% of its fair market value.
• 12-day waiting period. Your loan can’t close until at least 12 days after the later of your application or the date you receive the required Texas home equity notice.
• Approved closing locations. You must close at the office of a lender, an attorney or a title company, not at home.
• Your spouse must consent. Owners and their spouses sign, even a spouse who isn’t on the loan.
• 3-day right to cancel. After closing, you have three days to change your mind, and the lender can’t fund until that period ends.
• 2% fee cap. Lender and certain other fees are capped at 2% of the loan amount. Some costs, such as the appraisal, survey, title insurance and any discount points, are not counted toward the cap.
• One at a time, once a year. You can have only one Texas home equity loan on your home at a time, and generally no more than one every 12 months.
• No prepayment penalty. You can pay it off early at any time.
• Extra protection if things go wrong. Lenders generally can’t come after your other assets if the home sells for less than you owe, and foreclosure requires a court order.

A Texas cash-out refinance has a long tail. Once your home has a Section 50(a)(6) loan, a later refinance generally stays under the same rules unless you refinance into a regular loan under Section 50(f)(2). That’s allowed after at least one year, with no new cash out and a loan of no more than 80% of the home’s value. Plan for this if you might want a simple rate-and-term refinance later.

Timeline tip: between the 12-day wait and the 3-day cancellation period, a Texas home equity loan takes at least about two weeks from application to money in hand, and often longer. Start early if you’re paying a contractor on a deadline.

Is the interest tax-deductible?

It can be, but only in specific cases. Under current federal law, which the 2025 One Big Beautiful Bill Act made permanent:

• Interest on home equity debt is deductible only if you use the money to buy, build or substantially improve the home that secures the loan.
• Money used for debt consolidation, a car, tuition or other personal expenses doesn’t qualify.
• The deduction applies to up to $750,000 of total mortgage debt ($375,000 if married filing separately).
• You have to itemize to benefit. If you take the standard deduction, it won’t help.

Talk to a tax professional about your own situation.

How to choose: three questions

1. Is today’s rate higher than the rate on my current mortgage? If yes, a HELOC or home equity loan usually beats a cash-out refinance, because you keep your low rate on the balance you already owe.
2. Do I know exactly how much I need? One known amount points to a home equity loan or cash-out refinance. Costs that arrive over months, like a renovation, point to a HELOC.
3. How much payment change can I handle? If a rising payment would strain your budget, favor a fixed-rate option.

Not sure yet? Ask Lowi™ to walk through your numbers, or set up rate alerts so you know when refinancing starts to make sense.

Before you sign

• Compare the APR, not just the rate, and ask for every fee in writing.
• For a HELOC, ask about the margin, any rate cap, the draw period, and what happens to the payment when the draw period ends.
• Read your Loan Estimate and Closing Disclosure carefully. Our Closing Disclosure guide shows what to check line by line.
• All three options use your home as collateral. Borrow for things that improve your finances, not just your spending.